The House Friday passed a bill that seeks to recover billions of dollars from producers who hold flawed deepwater oil and natural gas leases that were issued by the Interior Department in 1998 and 1999.

The provision was inserted at the last minute in a farm bill, which the House approved by 231-191. It would force holders of the flawed 1998-1999 offshore leases to renegotiate their contracts with the Department of Interior or pay a “conservation of resources fee” in order to bid on future government leases.

The fee mirrors one that the House passed during the first 100 hours of the Democratic agenda in January (see Daily GPI, Jan. 19). But the fee was excluded from energy legislation the Senate passed last month. Senate Democrats, however, tried to impose an excise tax on oil and gas companies, which Republicans ultimately defeated (see Daily GPI, June 25).

The Senate is not expected to take up its version of the farm bill until after the August recess, but Republican opposition is already mounting to including a similar fee in it. A farm bill “is not the right place to decide this issue,” said Sen. Pete Domenici of New Mexico, the ranking Republican on the Senate Energy and Natural Resources Committee. “This complicated question would best be addressed in the House and Senate committees that have jurisdiction.”

“While I agree that it is unfortunate that an error made by the Clinton administration has cost the federal Treasury [billions in] revenues, a punitive provision such as the one in the House farm bill will not solve the problem. In fact, it will make it worse by ensuring years of litigation.”

“Imposing fees on domestic oil and gas production would only serve to raise the price of gasoline, and could cause a delay in leasing…It is my hope that the Senate will move forward with a farm bill free of these types of measures…I look forward to finding a better, legally permissible approach to the [Outer Continental Shelf] lease question that will bring companies back to the table and bring revenue into the federal Treasury.”

Only a handful of the holders of the flawed leases have renegotiated their leases so far with Interior, agreeing to incorporate price thresholds in the leases that would require the payment of royalties on future production, but not on past production.

The Bush administration objects to the House bill’s provisions forcing producers to renegotiate the 1998-1999 leases, which are costing the federal government billions of dollars in lost revenues. The administration said it favors allowing producers to voluntarily rework the terms of the disputed leases. Producers also oppose the bill, saying it would deter investment in drilling.

It’s estimated that Interior’s Minerals Management Service (MMS) issued 1,032 deepwater Gulf of Mexico leases in 1998-1999 without price thresholds. Absent these price ceilings, producers have been able to escape the payment of royalties on certain volumes of offshore production despite the escalation of oil and gas prices. Federal auditors have estimated that the federal government has lost $900 million-$1 billion in royalties so far and could lose up to between $6.4 billion and $9.8 billion over the life of the leases if they are not renegotiated (see Daily GPI, April 16).

The disputed leases were issued following enactment of the 1995 royalty-relief law, which offered producers royalty breaks when oil and gas prices were low to spur exploration and production in the deepwater Gulf. The royalty breaks were to end when oil and gas prices exceeded the established price thresholds in the leases. The thresholds were included in the 1996, 1997 and 2000 leases, but the MMS left them out in the 1998 and 1999 leases.

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