The Department of Justice (DOJ) last week asked the Supreme Court to overturn an appeals court ruling that has allowed Anadarko Petroleum Corp. to avoid paying royalties allegedly owed over a four-year period on eight oil and natural gas leases in the Gulf of Mexico (GOM).

In its filing to the Supreme Court, DOJ said if the ruling were to stand, other producers could avoid paying royalties that "will likely cost the United States at least $19 billion in forgone or refunded royalties." The lower courts' interpretation of the federal royalty relief law was "flatly wrong," and the amount of money at stake is worthy of a high court review, the filing stated.

The case is now more than three years old. The Fifth Circuit Court of Appeals in New Orleans in January upheld a Lake Charles, LA, district court's decision in 2007 that Anadarko would not have to pay the royalties (see NGI, Jan. 19). The Outer Continental Shelf Deepwater Royalty Relief Act of 1995 gave producers royalty relief to promote increased exploration in the GOM, and it authorized the Department of Interior (DOI) to suspend royalties collection from all new and preexisting leases and instead to impose price or volume thresholds to determine when royalty payments should be made.

Between 1996 and 2000 Kerr-McGee Oil and Gas Corp. purchased eight GOM leases that were subject to royalty relief. The price threshold was subsequently triggered for royalty payments to begin, but none of the leases triggered the volume threshold. DOI said the price threshold was enough to trigger royalty payments, but the producer challenged the order to begin paying royalties in district court (see NGI, March 27, 2006) and it won its case based on the volume thresholds (see NGI, Nov. 5, 2007). As the case began moving through the appeals process, Anadarko acquired Kerr-McGee in June 2006.

If the government were to lose the case, the costs could run into the billions. In 2006 then-DOI Deputy Director Walter D. Cruickshank said the government could lose more than $500 million in past and future royalties if the case were lost. However, last year DOI said the government could lose as much as $30 billion on royalties from offshore leases issued between 1996 and 2000 (see NGI, March 3, 2008).

The Supreme Court is not expected to consider whether to hear the case until justices return in early October.

©Copyright 2009 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.