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API's Cavaney: House Bill Restricts Bidding on New Leases in '07

June 19, 2006
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A House spending bill amendment would "penalize scores" of oil and natural gas producers who hold royalty-free leases negotiated in 1998 and 1999 by barring them from bidding on new Outer Continental Shelf (OCS) leases in 2007, said the president of the American Petroleum Institute (API) last Monday.

"Virtually every company, large and small, engaged in the Gulf of Mexico OCS would be barred from participating in lease sales in 2007," API President Red Cavaney said in a letter to Democratic Reps. Edward Markey of Massachusetts and Maurice Hinchey of New York, who sponsored the amendment that was included in the fiscal year 2007 Interior, Environment and Related Agencies appropriations bill passed by the House in late May (see NGI, May 22). The measure bars leaseholders that aren't paying royalties on existing production in the Gulf of Mexico from bidding on future leases.

Markey and Hinchey said their measure targets the approximately 56 producers who hold 576 active leases on which royalties are not being paid. Cavaney countered that these producers "are the core of this country's deepwater experience and expertise and have continually and reliably brought U.S. oil and gas to American customers."

At a time when "our nation is looking to decrease its dependence on potentially unreliable foreign sources of oil, legislation such as Hinchey-Markey could have the perverse effect of restricting domestic production. With most of the OCS off limits to development, the last thing we should be doing in this tight supply environment is blocking access to vital available domestic resources," he noted.

The amendment in question, according to Hinchey and Markey, seeks to rework a large number of royalty-free leases that were issued by the Department of Interior in 1998 and 1999. The agency failed to include in the lease contracts price ceilings for oil and gas, which when exceeded make production from the leases royalty bearing. The Government Accountability Office (GAO) estimates the federal government is losing billions of dollars as a result of the omissions.

Markey and Hinchey say that producers holding the 1998 and 1999 royalty-free leases would be able to bid on future leases if they agree to renegotiate their existing leases to allow for the suspension of royalty relief when oil and gas prices reach certain levels. But Cavaney pointed out that language in the Interior appropriations bill "does not say anything with regard to renegotiating the referenced leases." Its chief purpose is to "penalize" offshore producers, he said.

Cavaney contends the amendment "risks sacrificing" the government's royalty-relief program, which he said has been a "huge success" over the years. As a result of the program, "overall deepwater gas production is up 407% and oil production has risen 386% since 1996, providing billions in revenue to the federal government," he said. "Given the high cost of deepwater exploration, much of this production would not have happened without the royalty-relief program."

He called the amendment bad energy policy. "The negative impact of the Hinchey-Markey language is broadly recognized. It is opposed not only by the oil and gas industry, but also by a broad array of business, agricultural and consumer groups."

Copies of the API letter were sent to three other House lawmakers: Democratic Reps. Nick Rahall of West Virginia, Raul M. Grijalva of Arizona and James. P. Moran of Virginia. The lawmakers joined Markey and Hinchey in sending a letter to API earlier this month, disputing claims by oil and gas producers that the amendment would lead to the breach of exiting leases or would bar so many U.S. producers from purchasing new leases that it would effectively outsource production in the Gulf and elsewhere to foreign competition. The House Democrats called the producer allegations "false and misleading."

Copies also were sent to the CEOs of the major energy companies, including ExxonMobil, British Petroleum, ConocoPhillips, Shell Oil, Chevron Corp. and Kerr-McGee Corp., as well as the Domestic Petroleum Council.

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