The Bush administration last Thursday signed new agreements with five major producers to remedy the flawed 1998 and 1999 Gulf of Mexico oil and natural gas leases that are costing the federal government billions of dollars in lost revenues. But the contracts call for the recovery of royalties only on new production (starting Oct. 1 of this year), and do not require payment of royalties on past production from the defective leases. As a result, the renegotiated deals failed to silence Capitol Hill critics.

BP, ConocoPhillips, Marathon Oil, Shell and Walter Oil and Gas signed the agreements with C. Stephen Allred, assistant secretary of Land and Minerals Management, who is heading up the Interior Department’s effort to renegotiate the 1998-1999 leases. There still are 41 companies that own faulty leases, but that have not renegotiated them with Interior, the department said. Allred is talking to other producers, including Chevron, according to Gary Strasburg, a spokesman for Interior’s Minerals Management Service (MMS).

He estimated that the five producers owned 131 of the 570 1998-1999 leases involved. Of those 131 leases, Strasburg said 17 are producing.

“While these agreements we signed today are a step in the right direction, we look forward to continuing to work with Congress on this issue,” he added. “We appreciate and commend these companies for voluntarily signing these lease amendments. We encourage the remaining companies that have not yet agreed to sign to join us in resolving this issue.”

<>Rep. Tom Davis (R-VA), chairman of the Government Reform Committee, and Rep. Darrell Issa, chairman of the Energy and Resources Subcommittee, said they were encouraged by Allred’s efforts, but they noted that nearly 50 companies have not reached agreement or are not even negotiating with Interior to fix the leases. “More importantly, these agreements only address royalties from production beginning Oct. 1, 2006. Therefore, almost $2 billion of money owed to the American taxpayer is left uncollected.”

Interior’s MMS gave producers a break on royalties in the late 1990s, when oil and gas prices were low, to spur exploration and production in the Gulf. The lease agreements contained language stating that the price relief would come to an end when oil and gas market prices soared above a certain level. However, the MMS left this language out of the 1998 and 1999 leases — a mistake that is costing the government billions in lost royalties.

The lease agreements signed last Thursday are designed to remedy the omission but only for production that occurred on or after Oct. 1. MMS said few of the 1998-1999 leases produced oil and gas before that date.

While Interior was busy negotiating these new agreements with producers, House Reform Committee lawmakers last Thursday called on U.S. Attorney General Alberto Gonzales to review a legal analysis that concludes the Bush administration — despite statements to the contrary — does have the legal recourse to recover billions of dollars in revenue on past production from the flawed deepwater leases.

“While the MMS has stated that these leases were executed in error, they have also stated that there is now nothing that can be done to recover lost taxpayer revenue [on past production from the leases]. It appears that the assertion by MMS that there are no available remedies may be incorrect,” wrote Reps. Davis, Issa, Henry Waxman (D-CA) and Diane E. Watson (D-CA) in a letter to Gonzales.

Stephen Lowey, an attorney with the law firm of Lowey Dannenberg Bemporad & Selinger PC in White Plains, NY, concluded that the Justice Department has the legal recourse to immediately seek recovery of lost taxpayer revenue stemming from the defective 1998-1999 Gulf leases that allowed producers to avoid payment of royalties. The law firm specializes in consumer protection issues, as well as securities law and antitrust law.

“We would like to know your assessment of Mr. Lowey’s analysis and whether you [Gonzales] agree with him that the department has the authority to terminate the leases and take other remedial action,” the House lawmakers said. “If you disagree with his analysis, we would like you to provide the committee with a legal analysis explaining why.”

In an October letter to Davis and Waxman, Lowey said he “strongly disagree[d] with the legal basis for MMS’ earlier determination to do nothing to recover” royalties on past production. MMS Director Johnnie Burton at the time said it would be too difficult to recover royalties on past production from the faulty 1998-1999 leases. She noted that the Interior agency instead intended to focus on retrieving royalties on future production from the leases (see NGI, Sept. 25). The agreements signed last Thursday are the outcome of that approach.

“MMS is wrong. The United States Congress and American taxpayers do not have to live with this mistake. Solid grounds exist to overturn the decision of MMS not to take any legal action to set aside or reform these defective contracts,” Lowey told Davis and Waxman.

The attorney general “can and should take action” to recover the royalties on past production, he said. “I urge you both [Davis and Waxman] to write him and demand that he do so. If he, too, refuses, then I urge you both to propose remedial legislation so that American taxpayers will not have to pay for this multi-billion dollar mistake.”

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