The Department of Interior and Congress should pursue a two-pronged strategy to recover royalties from producers that hold the 1998-1999 deepwater oil and natural gas leases that lack critical price thresholds, according to a report issued by an Interior-commissioned panel.
First, Interior should continue to seek voluntary royalty payment agreements with holders of the flawed 1998-1999 leases. The report further recommended that Congress and Interior Secretary Dirk Kempthorne continue to explore legislative solutions to the problem, which it said could address the loss of royalties without violating legitimately signed contracts.
And to prevent this scenario from recurring in the future, it recommended that the Minerals Management Service (MMS) and Interior establish periodic, comprehensive and formally structured reviews of procedures and guidelines to ensure they are being implemented correctly and successfully, as well as require additional annual ethics training for staff involved in royalty management.
The report was conducted by the Royalty Management Subcommittee under the auspices of the Royalty Policy Committee, an independent advisory board appointed by the Interior secretary to advise the MMS on royalty management issues and other mineral-related policies.
Kempthorne established the subcommittee in November 2006 in an effort to quell congressional criticism of Interior's royalty-collection practices, which came under attack for the agency's failure to include price ceilings in 1998 and 1999 Gulf of Mexico leases (see NGI, Nov. 20, 2006). The Government Accountability Office has estimated the oversight could cost the federal government up to $10 billion dollars in lost royalties over the life of the flawed leases.
The lease price ceilings are designed to cut off royalty relief to producers when oil and gas prices reach a certain level. But without this cut-off point in the 1998 and 1999 leases, producers who negotiated leases in those two years escaped paying royalties on production up to a specific volume limit. The price caps that trigger royalties were included in leases that were issued in 1996, 1997 and 2000, but were not in the 1998 and 1999 leases due to an oversight on the part of the MMS. Congress has continued to put pressure on producers to renegotiate these leases with the MMS.
An investigation by a House Oversight and Government Reform subcommittee in 2006 found that the flawed leases were the result of gross mismanagement and a failure of accountability on the part of Interior and the MMS (see NGI, Oct. 2, 2006). A review of the matter by Interior Inspector General Earl Devaney confirmed that the omission of the lease price thresholds was first detected in 2000 but then was covered up by Interior employees (see NGI, Sept. 18, 2006).
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