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Producers Agree to Modify '98, '99 Royalty Agreements

BP, ConocoPhillips, Marathon Oil, Shell, and Walter Oil and Gas signed agreements Thursday with C. Stephen Allred, U.S. assistant secretary of Land and Minerals Management, that address the problem of missing price thresholds in deepwater Gulf of Mexico oil and gas leases that were issued in 1998 and 1999. Under the new agreements the producers will pay additional royalties on oil and gas produced under the leases. However, the payments will be made for production that started on Oct. 1, 2006.

"I am pleased at the progress we are making on resolving this issue," said Allred. "While the omitted price thresholds did not occur during this administration, we are continuing to work to resolve this difficult problem in a manner that ensures the American taxpayer receives a fair rate of return.

"While these agreements we signed today are a step in the right direction, we look forward to continuing to work with Congress on this issue," he added. "We appreciate and commend these companies for voluntarily signing these lease amendments. We encourage the remaining companies that have not yet agreed to sign to join us in resolving this issue."

Deepwater leases issued during this time included a royalty incentive to encourage companies to explore for oil and gas in areas where the costs to explore and produce were high. The incentive allowed companies to produce a set volume of oil and gas before they would begin paying royalties. The incentive would not apply if market prices exceeded a certain threshold.

However, for leases issued in 1998 and 1999, a price threshold was omitted and, as a result, companies have not been required to pay royalties until all of the incentive volume was produced, even when prices are high. The agreements signed Thursday are designed to remedy this omission but only for production that occurred on or after Oct. 1. MMS said few leases produced oil and gas before that date.

While the Minerals Management Service (MMS) was busy negotiating these new agreements with producers, House Reform Committee lawmakers Thursday called on U.S. Attorney General Alberto Gonzales to review a legal analysis that concludes the Bush administration -- despite statements to the contrary -- does have the legal recourse to recover billions of dollars in lost revenue from the flawed deepwater leases.

"While the MMS has stated that these leases were executed in error, they have also stated that there is now nothing that can be done to recover lost taxpayer revenue. It appears that the assertion by MMS that there are no available remedies may be incorrect," wrote Committee Chairman Tom Davis (R-VA) and committee members Reps. Darrell Issa (R-CA), Henry Waxman (D-CA) and Diane E. Watson (D-CA) in a letter Thursday to Gonzales.

Stephen Lowey, an attorney with the law firm of Lowey Dannenberg Bemporad & Selinger PC in White Plains, NY, concluded that the Justice Department has the legal recourse to immediately seek recovery of lost taxpayer revenue stemming from the defective 1998-1999 Gulf of Mexico leases that allowed producers to forego payment of royalties to the federal government. The law firm specializes in consumer protection issues, as well as securities law and antitrust law.

"We would like to know your assessment of Mr. Lowey's analysis and whether you [Gonzales] agree with him that the department has the authority to terminate the leases and take other remedial action," the House lawmakers said. "If you disagree with his analysis, we would like you to provide the committee with a legal analysis explaining why."

In an October letter to Davis and Waxman, Lowey said he "strongly disagree[d] with the legal basis for MMS' earlier determination to do nothing to recover more than $7 billion in royalty payments" from the flawed leases. MMS Director Johnnie Burton at the time said it would be too difficult to recover royalties on past production from the faulty 1998-1999 leases. She noted that the Interior Department agency instead intended to focus on retrieving royalties on future production from the leases (see Daily GPI, Sept. 25). The agreements signed Thursday are the outcome of that approach.

Burton estimated that $1.3 billion in royalties had been lost so far due to the agency's failure to include price thresholds in the 1998-1999 Gulf leases. The Government Accountability Office projects that the revenue losses could go as high as $10 billion over the life of the leases if they are not renegotiated.

"MMS is wrong. The United States Congress and American taxpayers do not have to live with this mistake. Solid grounds exist to overturn the decision of MMS not to take any legal action to set aside or reform these defective contracts," Lowey told Davis and Waxman.

The attorney general "can and should take action" to recover the lost royalties, he said. "I urge you both [Davis and Waxman] to write him and demand that he do so. If he, too, refuses, then I urge you both to propose remedial legislation so that American taxpayers will not have to pay for this multi-billion dollar mistake."

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