The Interior Department’s Minerals Management Service (MMS) will forego attempts to try to collect $1.3 billion in oil and natural gas royalties that have been lost so far due to the failure of the agency to include prices ceilings in 1998 and 1999 leases, but rather will concentrate its efforts on recovering revenues on future production from the flawed leases, the head of the agency said Thursday.

It “would be very hard to recoup” the lost royalties on production that already has occurred under the 1998-1999 leases, said MMS Director Johnnie Burton, during a Platts-sponsored press briefing in Washington, DC.

The lease price ceilings 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, producers who negotiated leases in those two years have escaped paying royalties on production up to a specific volume limit. The price caps that trigger royalties were included in leases that were issued in 1996, 1997 and 2000, but were not in the 1998 and 1999 leases due a mistake on the part of the MMS. Congress has put pressure on producers to renegotiate these leases with the MMS.

Burton fielded countless questions about the missing price ceilings in the 1998-1999 leases. In the end, she said, “MMS messed up. Yes, it was a mistake. MMS has to live with it.”

She said that up to 20 of the 59 producers with interests in royalty-free deepwater leases in the Gulf of Mexico have contacted the MMS about potentially renegotiating their 1998 and 1999 leases.

But she noted that only 10 lease holders “have come in the building” to talk about correcting the lease oversight that is costing the federal government billions of dollars. Shell Oil and BP “keep telling me that they are very close to signing” new agreements that would include price thresholds in 1998 and 1999 leases, she told reporters. Burton declined to identify the other eight producers, saying that they had not given the MMS the authority to disclose their names.

The House Government Reform Committee has been investigating the missing price thresholds for seven months. Its probe has focused on approximately 1,000 leases that were issued without price thresholds in 1998 and 1999. Of those, Burton estimated that 570 leases still are active, with “probably a fairly good amount” held by the 10 producers who are renegotiating.

Burton noted that Interior would be turning over to Congress soon a list of all the producers who have interests in the 1998-1999 leases.

About 19 oil and gas leases that lack price thresholds currently are producing in the Gulf of Mexico, and roughly 25 leases have indicated discoveries, but the MMS doesn’t know whether they will be producible or not, Burton said. One company, who she refused to identify, “has probably the lion’s share” of the production in the Gulf from the 1998-1999 leases.

During a recent hearing, Burton assured Government Reform Committee Chairman Tom Davis (R-VA) that the MMS was “working hard” to recover the royalty revenues that are owed the federal government. Given the amount of money at stake, Davis warned that Congress would take action if the MMS fails to renegotiate the royalty-free leases.

She suggested that heavy-handed action by Congress against the lease holders could raise “questions of constitutionality and breach of contract.” The Bush administration “is very mindful of the contract law,” and “breaching a contract is not something this administration will do lightly.”

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