A House Government Reform subcommittee will hold another hearing Thursday to explore why some of the largest producers have managed to avoid paying royalties on production from deepwater oil and natural gas leases that were issued by the federal government in 1998 and 1999.

This will be the third hearing of the Energy and Resources Subcommittee, which has been investigating since March why price thresholds were omitted from the 1998 and 1999 leases for drilling on the Outer Continental Shelf (OCS).

The critical price ceilings serve as a benchmark to determine when oil and gas production becomes subject to federal royalties. Without them, producers who negotiated leases in 1998 and 1999 have been able to escape paying royalties on production up to a specific volume limit. The price caps were included in leases that were negotiated in 1996, 1997 and 2000, but for some unexplained reason were not in the 1998 and 1999 leases. The Government Accountability Office (GAO) has estimated that these royalty-free leases will cost the federal government upwards of $10 billion in lost revenue.

A “trail of irresponsibility and gross mismanagement” by the Interior Department led to the omissions of the price triggers in the leases, and an apparent “cover-up” by the agency served only to worsen the problem, subcommittee staff said in a memorandum in June (see Daily GPI, June 21).

At a hearing in late June, Congress called on executives from five production companies — Shell Oil, ConocoPhillips, Chevron, ExxonMobil and Kerr-McGee Corp. — to renegotiate the 1998 and 1999 leases with Interior’s Minerals Management Service (MMS). Most have indicated a willingness to work with the MMS to resolve the controversy (see Daily GPI, June 22). Representatives from some of the same companies are expected to appear at Thursday’s hearing, according to Congressional Quarterly’s Green Sheets.

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