Of 55-56 producers ranging from Amerada Hess to Woodside Energy that still hold royalty-free deepwater oil and natural gas leases, the Minerals Management Service (MMS) is actively renegotiating with 10 producers to correct the oversight that is costing the federal government billions of dollars, the head of the MMS told the House Government Reform Committee Thursday.

Shell is “ready to sign,” and BP is “close behind,” said MMS Director Johnnie Burton, during a committee oversight hearing into the missing price thresholds in leases that were issued in 1998 and 1999. The Government Accountability Office has projected the mistake will result in up to $10 billion in lost royalties over the life of the leases if the contracts are not renegotiated. Burton declined to identify the other eight producers, saying that they had not given the MMS the authority to disclose their names.

All told, she said that 20 producers have contacted the Interior Department’s MMS about potentially renegotiating their 1998 and 1999 leases. “What I don’t know at this point is whether the others…did not contact us [because] their leases have been relinquished” or expired, Burton noted.

Committee Chairman Tom Davis (R-VA) called on Burton to provide the committee with an inventory of which companies are renegotiating their leases, the number of leases involved and when they will expire.

The committee’s investigation has focused on an estimated 1,100 leases that were issued without price thresholds in 1998 and 1999. Of those, Burton estimated that 700 leases still are active, with “probably a fairly good amount” held by the 10 producers who are renegotiating.

About 17 oil and gas leases that lack price thresholds currently are producing in the Gulf of Mexico, and roughly 27 leases have indicated discoveries, but the MMS doesn’t know whether they will be producible or not, Burton said. The lease price thresholds 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, the producers have escaped paying royalties on production up to a specific volume limit.

Burton assured Davis that the MMS was “working hard” to recover the royalty revenues that are owed the federal government. Given the amount of money on the table, Davis warned that Congress would take action if the MMS fails at renegotiating the leases.

While Interior wants to recover the royalty revenues, it is opposed to forcing producers to come to the negotiating table, said P. Lynn Scarlett, deputy secretary of Interior. “It’s very important that we uphold the sanctity of…contracts,” she noted. The department is relying on producers to voluntarily renegotiate their lease contracts.

This rankled Rep. Edward Markey (D-MA), who said he thought the Bush administration should put its “thumb on the scale” to even out the negotiations. He believes a proposal, sponsored by him and Rep. Maurice Hinchley (D-NY), would be a sufficient “stick” to get producers to the bargaining table. The proposal, which was passed by the House last May as part of the Interior spending bill for fiscal year 2007, would foreclose producers from bidding on future leases if they refuse to renegotiate their 1998 and 1999 royalty-free leases.

The Bush administration opposes the Markey/Hinchley measure. “We do have concerns…about any actions that would directly undermine contracts,” said Scarlett. She noted that if Interior refused to abide by the terms of the 1998 and 1999 contracts, it could affect the ability of the entire federal government to negotiate contracts in the future.

Rep. Darrell Issa (R-CA), whose Energy and Resources Subcommittee has been at the forefront of the investigation, also disagreed with the Markey/Hinchley proposal, saying he didn’t think the solution was fair. He said he believes the debacle over the price thresholds will be resolved, not by force, but by example.

“If one company signs [a renegotiated lease], that will be the model for all of them,” Issa said.

The committee hearing came one day after Interior Inspector General Earl Devaney told Issa’s subcommittee that the omission of the price thresholds was “an example of bureaucratic bungling.” He further testified that MMS personnel chose to cover up the mistake when it was discovered in 2000 rather than report it to their superiors. Devaney blamed this failure on a “culture of irresponsibility” that he said is pervasive in the department (see Daily GPI, Sept. 14).

Devaney’s most-damning statement was: “short of a crime, anything goes at the highest level of the Department of Interior.”

The 1998 and 1999 leases “are only a small part of what’s wrong with Interior,” said Rep. Henry Waxman (D-CA). The MMS “may actually be collaborating with industry to discourage auditors from collecting royalties,” he charged. “This looks like an agency that has been captured by the industry [that] it is supposed to be overseeing… There are serious problems at the top” of Interior.

Rep. Carolyn Maloney (D-NY) called Devaney’s testimony “tremendously disturbing,” noting that the MMS was a “revolving door,” with half of the people from the oil and natural gas industry. She went as far as to call for the abolishment of the department, with its oversight function to be moved elsewhere in the federal government.

Rep. Dennis Kucinich (D-OH) called for all the 1998 and 1999 royalty-free leases to be canceled, and for the federal government to recover the billions of dollars in lost royalties so far. He further recommended that a criminal investigation be conducted of the persons responsible for negotiating the royalty-free lease contracts.

Issa said the “central issue” from Devaney’s testimony was the cover-up of the missing price thresholds at Interior. The department made an “affirmative action” not to notify its supervisors of the mistake, which caused a “$10 billion-plus wound.” The public will not accept “the wink and the nod that that was just a mistake,” he noted.

©Copyright 2006Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.