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GAO: Government Could Be Out $54B from Faulty Leases, Litigation

June 9, 2008
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With crude oil prices exceeding $130 a barrel and natural gas prices nearing $12.50/Mcf, the Government Accountability Office (GAO) now says the federal government could be out as much as $54 billion in revenues -- far more than was previously estimated -- as a result of the faulty 1998-1999 deepwater leases and the court challenge by Kerr-McGee Oil and Gas, now part of Anadarko Petroleum, if upheld on appeal.

The 1998-1999 leases alone, which omitted the critical price thresholds, could yield revenue losses between $8.7 billion and $14.7 billion under a scenario in which oil prices are $100/bbl and natural gas prices are $8/Mcf, the GAO said in a report issued last Thursday. Both oil and gas prices have shot up since the agency did its analysis for the report, suggesting the possibility that the losses could be even greater.

In April 2007, when the GAO last calculated the potential losses from the 1998-1999 Gulf of Mexico leases, it estimated that they would range from $4.3 billion to $10.5 billion.

The revenue losses could be even greater if the U.S. District Court for the Western District of Louisiana's ruling in favor of Kerr-McGee is upheld on appeal. In October 2007 the court held that the Deep Water Royalty Relief Act (DWRRA) did not provide the Interior Department with the authority to impose price thresholds on production below the royalty suspension volumes for leases issued from 1996 through 2000 (see NGI, Nov. 5, 2007). The Department of Justice has filed a notice to appeal the decision. Kerr-McGee filed the lawsuit in March 2006, five months before it was acquired by Anadarko Petroleum.

"The federal government may have to refund over $1.13 billion in royalties that have already been collected from DWRRA leases issued in 1996, 1997 and 2000 if the government loses on appeal," the GAO said in the report, which was requested by 24 lawmakers, including Sens. Jeff Bingaman (D-NM), Carl Levin (D-MI) and Ron Wyden (D-OR) and Rep. Nick J. Rahall (D-WV).

The study also estimated that the federal government faces forgoing royalty revenues of as much as $38.3 billion for the 1996, 1997 and 2000 deepwater leases, under a scenario in which prices for oil and gas are $100/bbl and $8/Mcf, respectively, over the next 25 years. Interior's Minerals Management Service (MMS) earlier this year projected that future forgone revenue losses from these leases would be between $15.7 billion and $21.2 billion.

Assuming that the Louisiana district court's ruling in the Kerr-McGee case is upheld, future forgone royalties from all of the DWRRA leases issued from 1996 through 2000 could range from a low of about $21 billion to a high of $53 billion, according to the GAO. "The $21 billion figure assumes low production levels and oil and gas prices that average $70 per barrel and $6.50/Mcf over the lives of the leases. The $53 billion figure assumes high production levels and oil and gas prices that average $100 per barrel and $8/Mcf over the lives of the leases."

The favorable Kerr-McGee decision gave a shot in the arm to other offshore producers, which are fighting the efforts of the federal government to collect billions in royalties on 1998-1999 deepwater leases that, due to a mistake on the part of Interior, failed to include price thresholds, which were intended to cut off royalty relief to producers when the market prices for oil and natural gas exceeded certain levels. As a result of this oversight, producers have been able to forgo royalty payments on certain volumes of production (see NGI, July 31, 2006).

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