Forty-three senators and 10 House lawmakers sent letters last week to the Bush administration expressing their dismay with a recent federal court ruling that could exempt producers from the payment of royalties on oil and natural gas produced from deepwater leases acquired between 1996 and 2000, a move that would cost the federal government billions of dollars.

The Senate letter, written by Sen. Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee, called on President Bush to outline the steps that he plans to take to address this "serious new problem." Several congressional proposals have been developed to tackle these issues, but the administration has failed to support any of them to date, Bingaman wrote in the letter, which was delivered to the White House last Wednesday.

The House letter urged the Department of Justice (DOJ) to "dedicate the highest level personnel and the requisite resources to the appeal," stating that Congress "never intended to restrict the Department of Interior's ability to issue deepwater leases that require the payment of royalties when the price of oil [and natural gas] is high."

The Government Accountability Office (GAO) last year estimated that the exposure to the U.S. Treasury as a result of the court ruling could be as high as $60 billion in royalties that will not have to be paid by the oil and gas industry, Bingaman said. "That was when oil prices were about $60 per barrel." In addition, more than $1 billion in royalties already paid would have to be refunded to the oil and gas industry, he noted.

"Giving the oil and gas industry billions of dollars of the public's natural resources for free, with a billion-dollar refund from the U.S. Treasury to boot, is not an acceptable outcome," Bingaman told Bush, a proponent of the oil and gas industry.

Some Democratic senators are already talking about imposing new taxes and fees on oil and gas companies to cover shortfalls if the precedent-setting ruling is allowed to stand, Congressional Quarterly's Green Sheets reported. The House is counting on the recovery of billions of dollars from oil and gas producers to fund several pieces of legislation this year.

At issue is an Oct. 30 ruling by U.S. District Judge Patricia Minaldi for the Western District of Louisiana, which sided with Anadarko Petroleum Corp. in its dispute with the Interior Department over royalties on oil and natural gas production in the deepwater Gulf of Mexico (see NGI, Nov. 5).

Anadarko subsidiary Kerr-McGee Oil and Gas appealed a January 2006 Interior order, which directed the producer to pay $157 million in royalties on production stemming from eight leases that were acquired between 1996 and 2000 under the Deep Water Royalty Relief Act of 1995 (DWRRA). Under the relief law, Congress waived royalty payments for specific volumes of production in certain water depths to give producers a financial incentive to explore the deep waters of the Gulf.

Interior argued that the royalty relief available to the eight Kerr-McGee leases ended when the market price for oil and gas exceeded the price thresholds in the terms of the leases. Anadarko, however, countered that the 1995 law did not authorize the agency to include price triggers in any leases sold during the five-year period. The price triggers, when exceeded, would end royalty relief and require producers to pay royalties on certain volumes.

Minaldi ruled that the price thresholds in the Kerr-McGee leases were "unlawful under the plain text of the DWRRA." The Interior Department has asked the DOJ to appeal Minaldi's ruling on the closely watched oil and gas royalties case.

"We think that this ruling is wrong as a matter of law, but a similarly flawed lower court ruling on the 1995 [DWRRA] Act was upheld by the Fifth Circuit in 2004. We must contemplate the real possibility that the 1995 Act will be implemented in a way Congress never intended and in a way that would shock the sensibilities of most Americans," Bingaman said.

Rep. Nick Rahall (D-WV), chairman of the House Natural Resources Committee, also called on the Bush administration to appeal the Anadarko court decision, but he said he didn't believe that this action alone would be enough. "A positive outcome from an appeal is far from certain, and it is unwise to bet $60 billion of taxpayer money on the hope that an appeals court will recognize the true congressional intent to allow price thresholds in the 1996-2000 leases."

The House earlier this year passed legislation (HR 6, HR 3221) that "would solve this problem simply and unequivocally," Rahall said in a separate letter to the president last Tuesday. The two bills would require oil and gas producers to either renegotiate the terms of their leases to include price triggers, pay a hefty fee or face being barred from future leasing in the Gulf. The White House, however, has threatened to veto the measures.

"With [the Anadarko] court decision, and oil prices now exceeding $90 per barrel, I hope you will reconsider this stance and urge swift passage of an energy bill containing these necessary provisions," Rahall said.

Rep. Edward Markey (D-MA), who initially wrote the royalty-recovery language in the House energy bills, urged the president to drop his veto threat as well. "This critical provision would not only recover the $10 billion in lost royalties from the [flawed] 1998 and 1999 leases, but could also serve as a $60 billion insurance policy for the American people should [Anadarko's] Kerr-McGee ultimately prevail in its lawsuit," said Markey, one of the signatories of the House letter to DOJ.

The court decision gives a shot in the arm to offshore producers, which are fighting the efforts of the federal government to collect billions in royalties on 1998-1999 deepwater leases that, due to an oversight on the part of Interior, failed to include price thresholds. The price thresholds were intended to cut off royalty relief to producers when the market prices for oil and natural gas soared above certain levels (see NGI, June 26, 2006).

Congress and Interior so far have focused on collecting royalties from the holders of the flawed 1998-1999 leases, but the Anadarko decision throws into question whether royalties can be collected from the holders of 1996, 1997 and 2000 leases, which had price triggers included in their contracts.

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