The Senate voted late Thursday to approve a measure that would put an end to the “royalty holiday” for oil and natural gas producers in the Gulf of Mexico when energy prices reach high levels.

The amendment, sponsored by Sen. Jon Kyl (R-AZ), was included in a $469 billion defense spending bill for fiscal year 2007 that cleared the Senate. The provision would require the Department of Interior to establish price thresholds in all oil and gas leases that include royalty relief, thus ensuring payment of royalties when oil and gas prices are moderate or high.

The amendment further reaffirms Interior’s authority to include price thresholds in all leases issued between 1996 and 2000. This language is intended to resolve the controversy over the leases issued in 1998 and 1999, which did not include price thresholds and, as a result, have enabled some producers to escape paying royalties on volumes up to a certain level.

Because of the missing price thresholds in the 1998 and 1999 leases — a mistake on Interior’s part — the Government Accountability Office (GAO) has estimated that the federal government could lose up to $20 billion over the life of the leases.

Royalty incentives were established under the Deep Water Royalty Relief Act of 1995 as a way to encourage the development of new oil and gas supplies in the deepwater Gulf. However, at current prices, Kyl said producers don’t need extra incentives to develop more sources. Although the royalty holiday provisions expired in 2001, they were extended and expanded in the Energy Policy Act of 2005, a bill that Kyl voted against.

This is a hot-button issue on the House side as well. However, the House does not have a provision addressing royalty relief in its defense appropriations measure.

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