A report released last week by Rep. Edward Markey (D-MA) contends that more than 100 oil and natural gas companies are drilling in U.S. waters in the Gulf of Mexico (GOM) without paying royalties to the federal government. Nearly 40% of these active royalty-free leases are fully or partially owned by foreign governments, the report indicated.

The royalty breaks enjoyed by these companies have already cost the U.S. $11 billion in forgone revenue and are expected to cost more than $15.5 billion over the next decade — exceeding previous estimates by the Interior Department — and may ultimately reach a total of $40 billion as oil and gas production rises, according to Interior data obtained by the Democratic staff of the House Natural Resources Committee.

“Our nation is staring down the ‘sequester’ that will slash programs for the middle class and working poor. And yet this report shows that we are still squandering tens of billions of dollars in free drilling to companies like BP, Exxon and more than 100 other oil and gas companies. Oil companies and their allies in Congress can no longer defend these oil company windfalls,” said Markey, the ranking Democrat on the House Natural Resources Committee.

The Markey report, “Oil for Nothing…And Gas for Free: Royalty Breaks for Big Oil Cost America Billions,” estimates that the “Big Five” oil companies — BP plc, Chevron Corp., ConocoPhillips, ExxonMobil Corp. and Royal Dutch Shell plc — have received more than $2.8 billion in royalty breaks from such leases, paying nothing for 262 million bbl of oil and 361 Bcf of natural gas. Approximately 100 smaller, independent firms have avoided more than $8.1 billion in royalty payments for oil and gas produced under such leases, according to the report.

The leading recipients of royalty breaks have been Chevron, with $1.5 billion in avoided royalty payments; followed by Anadarko Petroleum Corp.in more than $1 billion of avoided payments; BHP Billiton Petroleum ($685 million); Hess Corp. ($565 million); and Murphy Oil Corp. ($400 million). State-owned foreign firms have extracted for free more than 65 million bbl of oil and more than 125 Bcf of natural gas from U.S. waters in the GOM, the report said.

It further noted that up to 3.14 billion boe remain for the taking under royalty-free leases. The Big Five producers are said to be sitting on more than half of this total, with 1.6 billion boe that they can extract without paying royalties.

In 1995 Congress enacted the Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA), which offered royalty-free drilling to producers for deepwater leases issued between 1996 and 2000. The intent of the law was to only provide royalty-free drilling when prices were low but oil and gas companies are still drilling under many of the leases as the result of a company legal challenge.

In October 2009, the U.S. Supreme Court handed Anadarko a major victory when justices rejected a government challenge to lower court decisions that blocked Interior from collecting billions in deepwater GOM gas and oil royalties.

On behalf of Interior, the Department of Justice had petitioned the high court to overturn a decision by the Fifth Circuit Court of Appeals in New Orleans, which ruled for Anadarko in an appeal of Department of Interior, et al., v. Kerr-McGee Oil and Gas Corp. The circuit court held that Anadarko would not have to pay royalties allegedly owed over a four-year period on eight leases in the GOM (see NGI, Oct. 12, 2009). The high court rejected the appeal without comment.

While the Supreme Court case only addressed leases once owned by Kerr-McGee Oil & Gas Corp., which Anadarko acquired in 2006, the court’s ruling had wider implications for other producers that have disputed royalty payments on leases signed between 1996 and 2000 under the DWRRA of 1995.

Under the 1995 law, Congress waived royalty payments for producers to encourage exploration of the deepwater GOM. At the time prices for oil and gas were significantly below what they are today. Interior contends that the royalty relief did not apply when oil and gas prices climbed above the price threshold benchmarks in the lease contracts. However, Interior’s former Minerals Management Service failed to include price thresholds in the 1998-1999 leases, which has allowed producers to escape payment of royalties on certain volumes of production in the Gulf.

Markey has pushed legislation for years to remedy the problem, including a measure he sponsored in the last session of Congress to recover the lost revenue. He said he will soon reintroduce a similar bill to eliminate the loophole.

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