The Interior Department's Minerals Management Service (MMS) currently is negotiating with 22 companies to include price triggers in the faulty deepwater oil and natural gas leases that were issued by the agency in 1998 and 1999, according to MMS Director Johnnie Burton.

This is in addition to the six companies that MMS reached deals with in mid-December, she wrote in a letter to Rep. Maurice Hinchey (D-NY) Tuesday. Those deals called for the recovery of royalties on future production from the flawed leases, but not on past production. But they failed to silence congressional critics, who want producers to pay royalties on past production from the disputed leases as well (see Daily GPI, Dec. 18, 2006).

As a result of the agreements, Burton estimated that royalty collections from the six companies that renegotiated their leases will be increased by $1.422 billion. This includes $156.4 million in future royalties from 19 producing leases in which the companies have interests; $1.042 billion in royalties from their interests in nine leases that have discoveries, but are not producing; and $224 million in royalties from their share of the active 1998-1999 leases that neither are producing nor have discoveries, she said.

As for past royalties, Burton calculated that the federal government would forego a total of $956 million in royalties on Gulf of Mexico production that occurred prior to October 2006. But she warned that the "estimate is not precise." The Government Accountability Office has projected that $10 billion or more could be lost over the life of the contracts if the leases that were awarded in 1998-1999 are not renegotiated.

Following the passage of the Deep Water Royalty Relief Act of 1995, the MMS gave producers a break on royalties in the late 1990s, when oil and gas prices were low, to spur exploration and production in the Gulf of Mexico. The lease agreements were supposed to contain price-threshold language stating that the price relief would come to an end when oil and gas market prices soared above a certain level. But the Interior agency left this language out of the 1998 and 1999 leases -- a mistake that is allowing producers to escape royalties despite the high prices for oil and natural gas. The MMS has been under intense pressure from Congress to renegotiate the leases to include the price triggers.

Hinchey was one of the architects of a Democratic measure, which cleared the House in January, that would force holders of flawed 1998-1999 offshore leases to renegotiate their contracts or pay a "conservation of resources fee" in order to bid on future government leases (see Daily GPI, Jan. 19). The Senate has yet to take up the measure.

The New York lawmaker strongly objects to allowing the holders of the 1998-1999 leases, who have not renegotiated their contracts, to participate in future lease sales. In response to Hinchey's questions, Burton reported that a total of 25 holders of the disputed leases participated in the two lease sales that were held in 2006, with 24 companies being awarded 404 leases.

Testifying before a House Natural Resources subcommittee Tuesday, Burton said the Bush administration, in order to avoid litigation, needs to use "sugar" rather than a "hammer" to get producers to renegotiate their faulty 1998-1999 leases (see Daily GPI, Feb. 28).

"I think that if there is a way to give something to bring them to the table that doesn't cost too much, maybe we need to do that," she told the Subcommittee on Energy and Mineral Resources. "But I think that using only a hammer is going to create a situation where we'll have lots of litigation because those contracts are valid even though they may be bad."

Litigation over the 1998-1999 deepwater oil and natural gas leases could enjoin future lease sales, Burton warned. "The repercussions of that action...would be disastrous for the country. Not only would we years down the road have decreases in production, we'd would have huge [decreases] in production."

The MMS has estimated that up to $13 billion in oil and gas royalties could be lost if the agency is enjoined for three years from carrying out lease sales, according to Burton.

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