House Government Reform Committee officials last Tuesday let the Interior Department know in no uncertain terms that the agency’s decision not to recoup billions of dollars in back royalties on oil and natural gas production from the flawed 1998 and 1999 deepwater leases was unacceptable.
In a letter to Interior Secretary Dirk Kempthorne, Committee Chairman Tom Davis (R-VA) and Rep. Darrell Issa (R-CA), chairman of the Energy and Resources Subcommittee, directed the agency to formulate a new plan to retrieve the back royalties from the 1998 and 1999 Gulf of Mexico leases, which — due to the omission of the price thresholds — allowed companies to produce oil and gas without paying royalties despite high-flying energy prices.
“The failure to recoup $2 billion rightfully owed to the American people is impermissible. Please explain your reasoning behind this grievous error and provide us with an amended plan to retrieve this money,” the two House lawmakers wrote. “The Interior Department must…make whole the American people by collecting the $2 billion already lost.”
The Davis-Issa letter came only days after Minerals Management Service (MMS) Director Johnnie Burton said the agency would forego efforts to try to collect royalties that have been lost so far due to the failure of the agency to include price ceilings in 1998 and 1999 leases, but rather would concentrate on recovering revenues on future production from the flawed leases (see NGI, Sept. 25). Burton estimated the lost revenues at $1.3 billion, while the Government Accountability Office pegged the lost revenues from the 1998-1999 leases at $2 billion so far.
It “would be very hard to recoup” the lost royalties on production that already has occurred under the 1998-1999 leases, Burton said during a Platts-sponsored press briefing in Washington, DC, in late September.
The lease price ceilings cut off royalty relief to producers when oil and gas prices are too high. Without this cut-off point in the 1998 and 1999 leases, producers who negotiated leases in those two years have escaped paying royalties on production up to a specific volume limit. The price caps that trigger royalties were included in leases that were issued in 1996, 1997 and 2000, but were not in the 1998 and 1999 leases due a mistake on the part of the MMS. Congress has put pressure on producers to renegotiate these leases with the MMS.
An eight-month investigation by the Energy and Resources Subcommittee found that the flawed leases were the result of gross mismanagement and a failure of accountability on the part of Interior and the MMS. A review of the matter by Interior Inspector General Earl Devaney confirmed that the omission of the lease price thresholds was first detected in 2000 but then was covered up (see NGI, Sept. 18). The discovery of the mistake and subsequent cover-up occurred before production on the 1998-1999 leases had begun and royalties were owed, according to the subcommittee. If the missing price thresholds had been properly reported to MMS superiors in 2000, the whole incident could have been avoided, Issa said.
Davis and Issa also expressed their dissatisfaction with the information that Burton had turned over to the committee regarding an inventory of the leases in question and a list of the companies that are currently negotiating with the department to correct the faulty leases. The information supplied by Burton was incomplete, and included only those companies that gave the MMS permission to be identified, the House lawmakers said. They demanded that Kempthorne provide a complete list of the producers, including those whose names were withheld from the committee.
Burton said that up to 20 of the 59 producers with interests in royalty-free deepwater leases in the Gulf of Mexico have contacted the MMS about potentially renegotiating their 1998 and 1999 leases.
But she noted that only 10 lease holders “have come in the building” to talk about correcting the lease oversight that is costing the federal government billions of dollars. Shell Oil and BP “keep telling me that they are very close to signing” new agreements that would include price thresholds in 1998 and 1999 leases, she said. Burton declined to identify the other eight producers, saying that they had not given the MMS the authority to disclose their names.
About 19 oil and gas leases that lack price thresholds currently are producing in the Gulf of Mexico, and roughly 25 leases have indicated discoveries, but the MMS doesn’t know whether they will be producible or not, Burton said. One company, who she refused to identify, “has probably the lion’s share” of the production in the Gulf from the 1998-1999 leases.
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