Sen. Pete Domenici (R-NM) Tuesday said he plans to offer a proposal to extend by three years the terms of the flawed 1998-1999 deepwater Gulf of Mexico leases in exchange for producers renegotiating their contracts to pay royalties. Sen. Dianne Feinstein (D-CA) signaled that she intends to introduce similar legislation.

“I think there’s an awful lot of them that are willing to sign on in exchange for what they will receive under my proposal…an extension of their leasehold,” Domenici said during a Senate Appropriations Committee’s Interior, Environment and Related Agencies Subcommittee hearing on the Department of Interior’s $9.7 billion budget for fiscal year 2008. Royalty recovery would become effective on the date of enactment of Domenici’s proposal.

“I recognize that this will not entirely solve the problem and make the Treasury 100% whole, but the bottom line is that this was a major mistake by the Clinton administration that has already cost the government nearly $1 billion…I am open to other reasonable options that are likely to withstand potential legal challenges, but we must act now,” he said.

Interior Secretary Dirk Kempthorne reported that six oil and gas companies have stepped forward so far to voluntarily pay royalties on the faulty 1998-1999 leases, while 40 companies that are responsible for about 80% of the production from the leases still are not paying royalties.

“I believe that those companies are waiting to see if, in fact, there’s going to be action taken by Congress. Therefore, I don’t believe that at this time, even though discussions continue, that we’re seeing any further movement beyond those six,” Kempthorne told Senate lawmakers.

Based on Kempthorne’s testimony, Feinstein said “it would be my intent then to draft legislation” that would extend the term of the leases in return for payment of royalties on the 1998-1999 leases. She did not give any further details about her proposal.

Offering the producers a longer term as an inducement “makes a lot of sense,” said Sen. Larry Craig (R-ID). But he reminded lawmakers that “these are valid contracts…Contract law is sacred. That’s what we’re struggling with.”

In the meantime, there’s a “wait-and-see situation until Congress solidifies where it wants to be on this issue,” Craig said.

The disputed leases were issued following enactment of the 1995 royalty-relief law, which offered producers royalty breaks when oil and gas prices were low to spur exploration and production in the deepwater Gulf. The royalty breaks were to end when oil and gas prices exceeded the established price thresholds in the leases. The thresholds were included in leases issued in 1996, 1997 and 2000, but Interior’s Minerals Management Service left them out of the 1998 and 1999 leases. The Government Accountability Office has estimated that the defective 1998-1999 leases could cost the federal government up to $20 billion in lost royalties over the life of the leases, if the contracts are not renegotiated.

Kempthorne said he has directed the department’s solicitor to be present when the MMS reviews all future lease documents to avoid a repeat of the situation with the 1998-1999 leases.

In January, the House passed a bill (HR 6) that forces holders of flawed 1998-1999 offshore leases to renegotiate their contracts or pay a “conservation of resources fee” in order to bid on future government leases (see Daily GPI, Jan. 19).

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