A Minerals Management Service (MMS) official, who signed 668 oil and natural gas deepwater leases that lacked price thresholds in 1998 and 1998, told a House Government Reform subcommittee Thursday the oversight was a “serious mistake” that was neither intentional nor calculated, but rather was due to poor processes at the agency.

Chris Oynes, regional director of MMS’s Gulf of Mexico office, further claimed he had “no recollection” that Chevron U.S.A. executives alerted him to the missing price thresholds on three occasions in the late 1990s. “I do not recall that that was raised at the meeting,” but “I do not dispute” Chevron’s claims, he said during the third hearing of the Energy and Resources Subcommittee into the matter. The panel has been investigating since March why price thresholds were absent from deepwater leases that major energy companies negotiated with the federal government in 1998 and 1999.

“You are not saying that Chevron [is] lying,” asked Subcommittee Chairman Darrell Issa (R-CA). “Absolutely not,” responded Oynes.

“I take exception to [the] statement” that processes and systems were to blame for the lease errors at the MMS, Issa said. “You signed these [lease] documents,” and were asked by Chevron executives why the price thresholds were missing, yet did nothing to correct the situation, the chairman remarked. “The system appears to be you, your assistant.”

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 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 over the life of the leases, of which nearly $2 billion has already been lost.

Keith Couvillon, deepwater land manager for Chevron North America Exploration and Production Co., said he recalled three times in which he brought the issue of the absent price thresholds to Oynes’ attention. The first time was at a meeting of the American Association of Professional Landmen’s Outer Continental Shelf Committee, now known as the OCS Advisory Board, with the MMS in the fall of 1998, he noted. The issue was “briefly raised,” Couvillon said, adding that it was not a “major topic” at the time because oil and gas prices were low.

He said he was told by Oynes that the lease addendum, which contained the price thresholds, was no longer necessary because the MMS had finalized its royalty relief regulations which were now incorporated by reference in the 1998 leases. Couvillon said he later raised the issue with respect to the 1999 leases, and was told by the MMS staff that they would look into it.

Couvillon, who signed off on the leases for Chevron, said he became “very concerned.” Then in early 2000, “we noticed when we were issued our leases that the addendum was attached again. I thought it was strange.” he said.

“Until a meeting with MMS in 2000, when they advised us that the ’98 and ’99 deepwater leases did not contain price thresholds, we were under the impression price thresholds applied to all those leases,” Couvillon noted. It was at this meeting that Chevron first learned that the missing price thresholds were an oversight, he said.

“Sometime in late ’99 or early 2000 was the first time that I became aware” of the absent price thresholds, Oynes recalled.

Noting that he has dealt with the MMS bureaucracy in Virginia, New Orleans and Washington, DC, Couvillon said he could “almost guarantee it that there [was] some breakdown in communication” at the agency with respect to leases and other matters. “Something like this [missing price thresholds] could slip under the radar screen until it became an issue,” he told House lawmakers.

Couvillon said he and others from Chevron are scheduled to meet with MMS officials Friday in an effort to reach a “fair and equitable outcome” with respect to the 1998 and 1999 offshore leases. He said the company wants to first see what the MMS has to offer, given that the leases were non-negotiable, “take-it-or-leave-it” arrangements with the federal government.

At a hearing in late June, Congress called on executives from five production companies — Shell Oil, ConocoPhillips, ExxonMobil, Kerr-McGee Corp., as well as Chevron — to renegotiate the 1998 and 1999 leases with the MMS. Most have signaled a willingness to work with the MMS to resolve the controversy (see Daily GPI, June 22).

Couvillon indicated that Chevron has a lot of money tied up in the leases. The producer currently has eight discoveries on 14 leases in the Gulf of Mexico that were issued in 1998 and 1999, he said. Couvillon told Issa that just one of Chevron’s projects will cost billions of dollars.

Issa assured Couvillon that the subcommittee is “very committed” to maintaining contract sanctity. An “honestly negotiated contract is a contract that will be upheld.”

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