Producers paid the federal government more than $3 billion to acquire oil and natural gas leases under a 1995 law that promoted drilling in the deepwater Gulf of Mexico (COM) and then spent $37 billion to develop them, according to the results of two studies commissioned by the American Petroleum Institute (API).

While some Capitol Hill lawmakers may seek to “penalize” producers for escaping payment of billions of dollars in royalties under the 1995 law, the API studies point out the overall economy and federal government profited from oil and gas activity under the law.

One study by Arlington, VA-based consulting firm Advanced Resources International (ARI) sought to determine the number of deepwater leases that were awarded between 1996 and 2000 under the Deep Water Royalty Relief Act, and the production volumes and expenditures related to those leases. The second study by Lexington, MA-based IHS Global Insight examined the economic impact of producing oil and gas from the Outer Continental Shelf leases under the 1995 act.

The ARI study found that the 3,391 deepwater leases awarded during that time produced $3.1 billion in bonuses for the federal government. Using industry and federal government average drilling and lifting costs, ARI calculated that companies spent $37.4 billion to develop the wells that were drilled. And it calculated that producers paid more than $5 billion in taxes between 1996 and 2000.

The report further showed that the leases resulted in the production of more than 400 million bbl of oil and more than 3 Tcf of natural gas.

The IHS study determined that the real gross domestic product (GDP) rose by an average of $4.5 billion per year as a result of oil and gas production from the leases and that employment increased by 91,000 jobs in 2005.

Despite the 1995 law contribution to the GDP and federal Treasury, Capitol Hill lawmakers are trying to “penalize” the producers who bought and developed the leases by “locking them out of future leases unless they agree to pay royalties that were legally waived [under] the 1995 law,” API said.

“The courts have ruled there was nothing ambiguous about the 1995 act. And those who would require the companies that took Congress at its word to now pay royalties retroactively are engaging in a dangerous game of bait-and-switch,” said Erik Milto, API’s upstream director.

The1995 law gave producers royalty relief in order to promote more oil and gas drilling in the deepwater GOM. It authorized the Department of Interior to suspend the collection of royalties from all new and preexisting federal deepwater leases when oil and gas prices fell below a certain threshold, and to restart royalty collection when prices rose above the threshold.

Due to an oversight by Interior in certain leases issued under the 1995 law — failure to include the price thresholds — the department lost billions of dollars in royalties, according to the Governmental Accountability Office. Interior tried to recover the royalties retroactively, but producers challenged the agency and the case wound up in the courts. It went all the way to the Supreme Court.

In October 2009, the high court handed Anadarko Petroleum Corp. — and other holders of these leases — a major victory when justices refused to consider a government challenge to lower court decisions that blocked the Interior from collecting billions in deepwater GOM natural gas and oil royalties (see NGI, Oct. 12, 2009). Despite the court ruling, some lawmakers have proposed that producers who refuse to pay royalties be denied access to future leases.

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.