In a startling departure from its hard-line stance, Kerr-McGee Corp. on Friday said it postponed its lawsuit against the Interior Department over royalty relief for deepwater oil and natural gas leases to participate in mediation of the dispute with the agency.
The lawsuit, which was filed in federal court in Lake Charles, LA, in March, has been placed on the back-burner “contingent on good-faith discussions to resolve the dispute” with Interior, said Kerr-McGee spokesman John Christiansen. The “door was opened and an invitation was extended” by the agency to participate in talks. He did not know when the mediation efforts would start. Interestingly, Kerr-McGee’s abrupt about-face came within a week of the announcement of plans for it to be acquired by Anadarko Petroleum (see Daily GPI, June 26).
Interior directed Kerr-McGee to pay $108 million in royalties on production from deepwater leases that were acquired in 1996 through 2000 under the Deep Water Royalty Relief Act of 1995. The Oklahoma City, OK-based producer is challenging Interior’s order. It contends the 1995 law did not authorize the agency to include price triggers for oil and gas in any leases sold during the five-year period that, when exceeded, would require producers to pay royalties on certain volumes.
“Kerr-McGee has previously sought to resolve this issue, and we welcome the department’s recent invitation for lessees to discuss the renegotiation of their deepwater leases,” including those obtained in 1998 and 1999 that erroneously omitted price ceilings, said Kerr-McGee CEO Luke R. Corbett.
“I encourage both the company lessees and the [Interior] to act swiftly to bring a fair and adequate resolution to all outstanding royalty matters under the 1995 Deep Water Royalty Relief Act,” said Sen. Pete Domenici (R-NM), who Thursday successfully attached an amendment to the fiscal year 2007 Interior spending bill to renegotiate leases where no royalties are being paid. “If the parties do not act, they can be sure that I will,” he warned.
Executives from Shell Oil, ConocoPhillips and Chevron testified on Capitol Hill recently that they were willing to meet with Interior to resolve the dispute over the missing price ceilings in the 1998 and 1999 deepwater oil and gas leases. But Kerr-McGee and ExxonMobil, which has had no production from the leases, signaled that renegotiating the leases with the federal government was not on their agenda (see Daily GPI, June 22).
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 not in the 1998 and 1999 leases — which only compounds the mystery. The Government Accountability Office has estimated that these royalty-free leases will cost the federal government upwards of $10 billion in lost revenue.
A House Government Reform subcommittee, which has been investigating the missing price ceilings, has concluded that “a trail of irresponsibility and gross mismanagement” by Interior led to the omissions of the price triggers in the leases, and that an apparent “cover-up” by the agency served to only worsen the problem (see Daily GPI, June 21).
In testimony before the subcommittee in late June, Gregory F. Pilcher, senior vice president and general counsel of Kerr-McGee, said “the absence of price triggers from the leases awarded in 1998 and 1999 does not appear to be a mistake; to the contrary, the absence of price triggers was necessary in order for those leases to be consistent with the law,” he noted. “We hope that Congress will permit the judicial system to do its work and…permit the underlying dispute to be resolved according to the rule of law.”
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