DEEPWATER ROYALTY RELIEF 'GIVEAWAY' NEEDS PERSPECTIVE

Bob Tippee
Editor

The New York Times did arithmetic, so Congress holds a hearing.

A reporter at the newspaper found in Department of Interior budget documents a value for production subject to deepwater royalty relief and some assumptions about oil and gas prices. From those data and the federal royalty rate he calculated that the federal government would forgo $7 billion over the next 5 years and concluded that it is "on the verge of one of the biggest giveaways of oil and gas in American history."

Congress jumped to attention. Democratic Sens. Ron Wyden of Oregon and Maria Cantwell of Washington asked Energy and Natural Resources Committee Chairman Pete V. Domenici (R-NM) to hold a hearing. Domenici seemed amenable (OGJ Online, Feb. 16, 2006). House Resource Committee Chairman Richard W. Pombo (R-Calif.) started an investigation.

Yet the newspaper report ignores much. Deepwater relief offers early-life incentives for enormously expensive, 20 and 30-year projects that wouldn't have been contemplated without the break. The relief expires later in project lives and, except for leases awarded in 1998-99, lapses when prices exceed specified levels.

The calculated $7 billion probably overstates the "giveaway" and in any case needs to be assessed in relation to the royalties the government will receive over entire project lives, not just 5 years' worth. That's revenue that would not have emerged, or at least not as early, without the relief.

And whatever that figure is, it doesn't include incomes and tax revenues associated with the latter-1990s revival of the Gulf of Mexico producing and affiliated industries, a revival directly related to deepwater royalty relief.

And then there are the 2.5 billion bbl of oil and 9.4 tcf of gas produced in deep water since 1996, the year after royalty relief was enacted. Most of that would not have entered the US market without the deepwater incentive.

A perspective that doesn't ignore everything except a big revenue number and high fuel prices thus can make the alleged giveaway look like a sound investment. But lawmakers taking their cues from the New York Times probably won't see things that way.

(Online Feb. 17, 2006; author's e-mail: bobt@ogjonline.com)

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