Federal measures exempting oil and natural gas producers active in the prodigious Gulf of Mexico from royalties could deprive the U.S. Treasury of a minimum $20 billion in lost revenues over the next two decades or more, according to information contained in a preliminary government report that was obtained by the New York Times.
Half of those lost revenues would stem from the omission of price thresholds in leases that were issued by the Interior Department’s Minerals Management Service (MMS) in 1998 and 1999, according to the preliminary estimates in a Government Accountability Office (GAO) report that was prepared at the request of Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the Senate Energy and Natural Resources Committee, and a number of other senators. Price caps were included in leases issued in 1996, 1997 and 2000, but were inadvertently omitted in the 1998 and 1999 leases, which MMS estimates could involve more than 1,100 leases.
As a result of the omissions, “these leases [continue] to be royalty free despite record high market prices for oil and gas,” Bingaman wrote Tuesday in a letter to outgoing Interior Secretary Gale Norton.
The GAO’s estimate of $10 billion in losses due to the exclusion of price thresholds in the 1998 and 1999 leases is significantly higher than the projection of a House Government Reform subcommittee earlier this month — $7 billion (see Daily GPI, March 6).
The draft GAO report further predicts that the federal Treasury could lose an additional $60 billion in royalty revenues if Kerr-McGee Oil & Gas Corp. wins its lawsuit disputing Interior’s authority to impose price thresholds on leases acquired between 1996 and 2000, Bingaman told Norton. “It is my belief that Congress intended for the price thresholds to apply to all leases under the…Deep Water Royalty Relief Act,” he said. Under the price thresholds, royalty relief for producers expires once oil and gas prices exceed a certain level.
The Kerr-McGee lawsuit, filed in federal court in Louisiana on March 17, contends that the agency’s price thresholds violate the Deep Water Royalty Relief Act of 1995, which was designed to encourage producers to explore for gas and oil in the high-cost, high-risk deepwater areas of the Gulf.
“The final figure is going to be big” in terms of loss of royalties, said William Wicker, a spokesman for Bingaman. “It’s clear from the preliminary figures” from the GAO, he told NGI. Wicker noted that GAO on Monday briefed the Senate energy panel staff on the results of its investigation so far. A final report is expected to be released in a couple of weeks.
In his letter to Norton, Bingaman said he was “extremely concerned” about the preliminary revenue-loss estimates from the GAO. “While I understand that these are preliminary numbers based on assumptions regarding future prices and production, the magnitude of these estimates gives rise to serious concerns. I write to inquire as to what you plan to do to address this situation and these significant potential losses to the taxpayers of our nation.”
The GAO report and Bingaman’s letter to Norton come amid heightened concern on Capitol Hill about the royalty relief that is being provided to producers, even as oil and gas prices have reached record levels and producers report stunning profits. Lawmakers in the Senate and House have responded by proposing legislation to abolish royalty relief for producers.
The Congressional Budget Office reported earlier this month that Senate legislation (S. 2314) seeking to scale back royalty relief for oil and gas producers in the Outer Continental Shelf would trigger an increase in the amount of oil and gas royalties paid to the federal government, but it also would result in a drop-off in bonus bid revenues flowing in the Treasury. Consequently, net receipts to the federal government from offshore leasing might not rise in the long run and could even fall over the next five years if royalty relief was abolished, it said (see Daily GPI, March 22).
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