Two of six deepwater leases underpinning the potentially large Gulf of Mexico discovery that was announced by Chevron Corp., Devon Energy Corp. and Statoil ASA last week (see Daily GPI, Sept. 6) do not include price thresholds, which would make a certain volume of production from these leases royalty-free despite the high energy prices, a Minerals Management Service (MMS) official confirmed Tuesday.

A House Government Reform subcommittee raised the possibility that some of the leases from the significant Gulf discovery may not have included price thresholds, and thus would be exempt from royalties, in a recent briefing memo.

The issue of the absent price thresholds “is a matter of paramount concern in light of Chevron’s recently announced new discovery in the [Outer Continental Shelf] Gulf of Mexico region that may include leases signed in 1998 and 1999,” said the Energy and Resources Subcommittee memo. Leases that were negotiated in those two years failed to include the price ceilings — an oversight by the Interior Department’s MMS that is forecast to cost the federal government $10 billion in lost revenue over the life of the leases, according to the Government Accountability Office (GAO).

The Gulf discovery, in the emerging Lower Tertiary trend, could hold 3-15 billion barrels of crude oil and large natural gas reserves as well. Significant volumes of oil and gas production from the field could be royalty-free as a result of the absent price thresholds.

MMS spokesman Gary Strasburg confirmed that two of the leases were for partial blocks that were negotiated in 1998 and did not contain price thresholds, leaving open the possibility that producers could avoid paying royalties up to a specific volume limit. However, four leases were for complete blocks that were negotiated in 1996. These leases included price thresholds and would be subject to royalties.

The large Chevron-Devon-Statoil discovery occurred on the four complete blocks that stem from the 1996 royalty-bearing leases, Strasburg said. But “even though the discovery came from the four blocks, there is a possibility that part of the [find] may have also come from the partial blocks” that involve the 1998 royalty-free leases, he noted. MMS declined to speculate on the revenues that could be lost as a result of the two leases.

The critical price thresholds 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 avoid payment of federal 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 were not in the 1998 and 1999 leases due to an oversight by the MMS.

Under pressure from Capitol Hill lawmakers, Chevron and other producers who hold royalty-free leases have been in talks with MMS to renegotiate their 1998 and 1999 oil and gas leases. However, given the sanctity of the contracts, the federal government is in a weak bargaining position.

The Energy and Resources Subcommittee is expected to cap off its seven-month investigation into the missing lease price thresholds Wednesday with another oversight hearing, during which Department of Interior Inspector General Earl Devaney will provide the preliminary results of his probe into the matter. “His testimony is expected to detail when Interior and MMS personnel learned of the lack of price thresholds, the individuals responsible for their absence and what actions employees took once the omission was discovered,” the subcommittee said.

“There is every indication that carelessness and irresponsibility contributed to this unprecedented loss to the American people. Professional negligence, however, is not peculiar to the Minerals Management Service,” the subcommittee briefing memo noted.

Devaney has concluded from past investigations that Interior “suffers from an institutionalized culture of managerial irresponsibility and a general lack of accountability,” the memo said.

On Thursday, the full House Government Reform Committee also will hold a hearing into the matter, with P. Lynn Scarlett, deputy secretary of Interior, and MMS Director Johnnie Burton scheduled to testify.

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