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Anadarko's Gulf Royalty Win Upheld on Appeal

Anadarko Petroleum Corp. sighed a breath of relief early last week after the Fifth Circuit Court of Appeals in New Orleans upheld a Lake Charles, LA, federal court's 2007 decision that the company did not have to pay the U.S. government millions of dollars in royalties on eight oil and natural gas leases in the Gulf of Mexico (GOM).

The case focused on a 1995 law that gave producers royalty relief in order to promote increased oil and gas drilling in the GOM. The Outer Continental Shelf Deepwater Royalty Relief Act authorizes the Department of the Interior to suspend the collection of oil and gas royalties from all new and preexisting federal deepwater leases and to impose price or volume thresholds in order to determine when royalty payments should recommence.

Between 1996 and 2000 Kerr-McGee Oil and Gas Corp., which is now owned by Anadarko, purchased the eight GOM leases that were subject to royalty relief. While the price threshold was subsequently triggered for royalty payments to begin, "not one of the leases" triggered the volume threshold -- production level of 87.5 MMboe per lease, effective for wells drilled in water deeper than 800 meters, the appeals court found. Interior claimed that breaking the price threshold was enough and ordered Kerr-McGee to pay royalties, but the producer challenged the order in district court (see NGI, March 27, 2006), and won based on the volume threshold argument (see NGI, Nov. 5, 2007). Last week the appeals court followed suit, citing the same reason.

The stakes in the case are high for the government. In March 2006 Interior released two memoranda sent earlier in the year by Walter D. Cruickshank, deputy director of the Minerals Management Service, which said the government could lose more than $500 million in past and future royalties if it lost the case. Cruickshank at the time said the bulk of that money already had been paid by other companies, but would have to be refunded if the government lost its case.

That number was revised last year when Interior noted that if the district court decision was not overturned, the federal government could lose as much as $30 billion in royalties on production from offshore leases issued between 1996 and 2000. The number included an estimated $9.1 billion that would be at risk if the 1998-1999 leases were not renegotiated to include price thresholds (see NGI, March 3, 2008).

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