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MMS Official: Removing OCS Drilling Ban Rests with States

Removing the moratorium on offshore oil and natural gas drilling isn't likely to take place on a "large scale," but rather is more likely to occur in a piecemeal fashion, with coastal states leading the charge, said Minerals Management Service (MMS) Director Randall Luthi Wednesday.

"I don't think it's going to be a large-scale change in the moratorium. It's going to be based upon what the states [ask for] and working with us and eventually Congress," he said during a press briefing at the OCS Policy Meeting in Herndon, VA. "I would [think] that would be the only way it would work right now. Possibly if several states joined together, it could be a larger chunk" of the moratorium that could be lifted.

"We want the states involved" to make the case for offshore development, Luthi said. "Virginia wants us to proceed" with drilling off its coast. A lease sale offshore Virginia is part of the five-year Outer Continental Shelf (OCS) leasing program for 2007-2012, but it will not occur unless both Congress and the president lift their offshore drilling bans.

Luthi said he supported removal of the drilling ban on the East and West Coasts. "I would like to see that changed," he told members of the policy committee. Before lifting the moratorium, "we have to show it [oil and gas] can be produced wisely, reliably and in [an] environmentally sensitive way." The energy industry has a "very good record" in this area, Luthi noted. In addition, "we need to look at...what is the benefit to the state to have offshore development."

He said he "realistically" doubted that any change would occur to the drilling moratorium during the remaining months of his term, which will probably end in January 2009.

The nation's dependence on the Gulf of Mexico for its energy resources is a cause for concern, Luthi said. "We're putting a lot of our eggs in one basket...We need to do more to try to expand the areas where our energy comes from." This became especially clear following Hurricanes Katrina and Rita, which caused significant damage to the Gulf infrastructure and stranded oil and gas supplies, he noted.

"I think we should begin [to look for reserves] at home" rather than importing from overseas, he said. "The only way to reduce [our] dependence is to increase our overall domestic energy production." Despite efforts to boost production of renewable fuels and improve efficiency and conservation, Luthi believes that oil, natural gas and coal will remain the nation's primary fuels "at least for the next generation."

On a separate issue, Luthi said the Department of Justice is "in the final throes of making [a] decision" about whether to appeal a Louisiana district court's decision upholding Kerr-McGee Oil & Gas' challenge to MMS' authority to include price thresholds in offshore leases issued between 1996 and 2000 pursuant to the Deep Water Royalty Relief Act of 1995 (DWRRA). The price thresholds were intended to cut off the royalty relief to producers that was authorized by Congress when oil and gas prices rose above certain benchmarks (see Daily GPI, Nov. 2, 2007).

He expects Justice to make a final decision in the "next days or weeks," he told reporters. If the Kerr-McGee ruling is upheld, the federal government could lose between $15.7 billion and $21.2 billion, according to MMS. The estimate does not include the disputed 1998-1999 leases, which have resulted in $1.3 billion in foregone royalties to the federal government to date.

A favorable win for Kerr-McGee "does indeed" make moot the issue of whether the holders of the 1998-1999 leases, which did not include the critical price thresholds, will be required to pay back royalties on production from the leases, Luthi said. The Kerr-McGee court case "dwarfs [the] issue surrounding 1998-1999 [leases]."

While the majority of the holders of the faulty 1998-1999 leases have not renegotiated their leases with MMS, six companies have agreed to at least begin paying royalties on future production from their leases. Luthi said MMS would not hold the six producers to their agreements if Kerr-McGee wins the court case on appeal. Those companies are Marathon, Burlington Resources, Shell, Walter Hydrocarbons, Walter Oil and Gas and BP.

Under the 1995 royalty-relief law, Congress waived royalty payments for producers to encourage exploration of the deepwater Gulf. At the time prices for oil and gas were significantly below what they are today. Interior contends that the royalty relief did not apply when oil and gas prices climbed above the price threshold benchmarks in the lease contracts. Kerr-McGee argued otherwise.

The Kerr-McGee case addresses the broader issue of whether Interior can, when commodity prices are high, cut off royalty relief to holders of leases that were issued between 1996 and 2000 under the DWRRA. The 1998-1999 leases are a "subset" of the Kerr-McGee case. There, producers are arguing that they are not required to pay royalties on certain volumes due to the failure of Interior to include price thresholds in the lease contracts for those two years.

MMS has come under fire for requesting only four additional royalty auditors in its fiscal year (FY) 2009 budget (see Daily GPI, Feb. 8). Luthi said the agency plans to seek a higher number of auditors in its FY 2010 budget due to a shift in the way it will conduct audits, but he could not say how many more.

"For [a] period of time, we were focusing on those companies that had the most leases...thinking that would be the best return on our dollar in terms of audits...We're shifting to a risk-based approach, which means you don't only look at those companies that have the most leases. You look at the company's history, you look at areas where it appears the highest risk is," he said.

He noted that the agency is more than halfway through developing this risk-based approach to auditing, which he said will require it to ask Congress for funding to hire more auditors in the agency's FY 2010 budget.

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