A report by the Congressional Research Service (CRS) finds that language in a House bill pending in Congress would require producers to pay billions of dollars in royalties on oil and natural gas production from leases issued between 1996 and 2000, regardless of the final outcome of a lawsuit brought by Anadarko Petroleum Corp. challenging the right of the federal government to recover royalties on those leases.

The House energy bill (HR 3221) contains a provision, originally drafted by Rep. Edward Markey (D-MA), to recover an estimated $10 billion in unpaid royalties on deepwater production from 1998-1999 leases that, due to an omission on the part of the Interior Department, failed to include price triggers to cut off royalty relief for producers when oil and gas prices were high.

Producers have challenged Interior's right to collect royalties on the flawed 1998-1999 leases, and Anadarko has taken this a step further -- challenging the agency's right to collect royalties from leases that were issued in 1996, 1997 and 2000 pursuant to the Deep Water Royalty Relief Act of 1995 (DWRRA). Unlike the faulty 1998-1999 leases, these leases contained price triggers to cut off royalty relief in times of high prices. Lawmakers have estimated that the Anadarko lawsuit, if upheld on appeal, could cost the federal government an additional $60 billion in lost revenues.

The CRS, the policy research arm of Congress, said the House energy bill, if signed into law, would not only recover the unpaid royalties from the 1998-1999 leases, but it also would protect against the loss of an additional $60 billion in royalties even if Anadarko prevails in its lawsuit, according to Markey, who requested the CRS report. This assumes that an energy bill containing the Markey language will be passed out of Congress this year, which at this late date seems remote.

The Markey provision 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 of Mexico. The White House has threatened to veto any energy bill that contains this language. The CRS previously concluded that there were no constitutional impediments to the royalty recovery language drafted by Markey.

Congressional concern over the prospect of losing billions of dollars in royalties reached a peak in late October, when U.S. District Judge Patricia Minaldi for the Western District of Louisiana sided with Anadarko Petroleum in its dispute with the Interior Department over royalties on oil and gas production in the deepwater Gulf (see NGI, Nov. 5).

Interior argued that the royalty relief available to Anadarko subsidiary Kerr-McGee Oil and Gas ended when the market price for oil and gas exceeded the price thresholds in the terms of its leases that were issued pursuant to the DWRRA. Anadarko, however, countered that the 1995 royalty-relief 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.

Forty-three senators and 10 House lawmakers sent letters earlier this month to the Bush administration expressing their dismay with the court ruling (see NGI, Nov. 12).

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