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Anadarko Prevails in High Court Challenge

Anadarko Petroleum Corp. -- and a host of other producers -- scored a major victory last week after the U.S. Supreme Court refused to consider a government challenge to lower court decisions that have blocked the Department of Interior (DOI) from collecting billions in deepwater Gulf of Mexico (GOM) natural gas and oil royalties.

On behalf of DOI, the Department of Justice (DOJ) in July had petitioned the high court to overturn the Fifth Circuit Court of Appeals in New Orleans, which early this year ruled for Anadarko in an appeal of Department of Interior, et al., v. Kerr-McGee Oil and Gas Corp. (see NGI, Jan. 19). The circuit court said Anadarko would not have to pay royalties allegedly owed over a four-year period on eight leases in the Gulf of Mexico (see NGI, July 20). Last Monday the high court rejected the DOJ appeal without comment.

The Supreme Court's decision "preserves the sanctity of law and brings resolution to this issue," Anadarko spokesman John Christiansen told NGI. "Eight different federal judges and four federal courts reviewed and interpreted the Deep Water Royalty Relief Act, and every one concluded that we acted in accordance with the law." The intent of Congress was "to assure that companies were afforded the royalty treatment it granted as encouragement to make huge investments in the deepwater Gulf of Mexico frontier."

Following the Supreme Court's decision, DOI Secretary Ken Salazar said he would "work with all involved in the days ahead to determine the best way forward." He offered no specific details on what DOI may do.

At stake are at least $19 billion in forgone and refunded royalties, the DOJ had argued in its certiorari petition to the Supreme Court. The case rejected Monday involved leases once owned by Kerr-McGee Oil & Gas Corp., which Anadarko acquired in 2006. However, the court's ruling is likely to impact other producers that have disputed royalty payments on leases signed between 1996 and 2000 under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995. The law was designed to encourage offshore development.

In its lawsuit, Anadarko had argued that the royalty relief act specifically prevented the government from collecting royalties until a minimum volume of gas and oil production was met. Anadarko disputed royalty payments between 1996 and 2000 on eight leases. DOI argued that the law gave it discretion to collect fees at a price threshold (see NGI, Nov. 7, 2007; March 27, 2006).

The high court's rejection "definitely affirms" the circuit court's ruling that Congress provided that royalty relief be based on volume limits and not price, said American Petroleum Institute (API) President Jack N. Gerard. "That act was passed at a time of historically low crude oil prices to increase production and sustain jobs in a struggling industry," he said. "It was enormously successful, helping to boost deepwater production by 50% in less than a decade."

DOJ had stated in its petition to the Supreme Court that whether Anadarko was required to pay royalties for the disputed leases over the four-year period was "the least of the matter."

Anadarko "and its corporate affiliates have interests in 10 other leases on which the [DOI] estimates an additional $169.3 million in royalties came due on production through 2007," the petition noted. "The court of appeals' decision will also govern the disposition of billions of additional dollars of potential federal revenue involving other lessees.

"There are 21 other pending administrative appeals of similar orders to pay royalties under Section 304 leases -- appeals that have generally been held in abeyance pending resolution of this case. And some similarly situated lessees have continued to pay royalties during this litigation; as of June 30, 2009, the [DOI] had collected an estimated $1.5 billion in royalties from leases issued in 1996, 1997 and 2000, the validity of which is called into doubt by the court of appeals' decision."

A Government Accountability Office analysis last year found that if the appellate court's ruling were to be upheld, forgone royalties from leases issued in 1996, 1997 and 2000 could top $38 billion over 25 years (see NGI, June 9, 2008). (Leases issued in 1998 and 1999 did not include the price thresholds, and that also has jeopardized billions in future royalty payments.)

Whether the ruling revives efforts by some on Capitol Hill to collect royalties from disputed leases also remained a question last week. Two years ago Rep. Ed Markey (D-MA) proposed legislation that, among other things, would have required producers to pay royalties from leases issued between 1996 and 2000 regardless of the outcome of the Anadarko lawsuit.

"It doesn't take an advanced legal mind to interpret what Congress meant in the Deep Water Royalty Relief Act -- it's right there in black and white," said Thomas J. Pyle, president of the Institute for Energy Research. "Unfortunately, now that this case has officially come to a close, it will likely be used by those who oppose responsible energy development as a cudgel to beat Congress into passing bad legislation that would otherwise have no legitimate place in the energy debate.

"Make no mistake," he said. "Oil and gas revenues from federal lands and waters contributed more than $23 billion to the Treasury in 2008 -- making this the single largest revenue raiser after federal income tax receipts. And with scarcely 3% of the Outer Continental Shelf currently leased for energy exploration, it's fair to say we haven't even scratched the surface of what could be a multi-trillion-dollar resource."

The decision by the Supreme Court to reject DOJ's appeal, said Pyle, "represents a clear victory for the rule of law and an unambiguous rebuke to those in the [Obama] administration who believe they have the unilateral power to make law, instead of the faithful obligation to enforce it."

API's Gerard said that "going forward, we trust that Congress will continue to pursue constructive energy policies that benefit the American people, while resisting the urge to take steps that attempt to change the rules of the game midstream and that discourage investment."

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