Appeals court backs earlier ruling for Kerr-McGee in deepwater royalty suit

A federal appeals court affirmed on Jan. 12 a US district court's ruling that Kerr-McGee Oil & Gas Corp. should not have to pay royalties on eight Gulf of Mexico deepwater leases from 1996 to 2000 despite price thresholds imposed by the US Department of the Interior.

The company, which is now part of Anadarko Petroleum Corp., argued that it should not have to pay royalties even though natural gas produced from the leases exceeded the leases' inflation-adjusted price threshold in 2003 because volume thresholds had not been reached. Congress established the thresholds as part of the 1995 Outer Continental Shelf Deepwater Royalty Relief Act which was designed to promote OCS exploration and production in deep water.

DOI disagrees with the US Fifth Circuit Court of Appeals ruling and is exploring every option, including appealing and continuing to work with Congress to resolve the matter, a spokesman told OGJ Washington Pulse in a Jan. 13 e-mail message.

"As we have said before, if the court's interpretation of Congress's action in 1995 is correct, certain leaseholders will be able to produce massive amounts of oil and gas without paying royalties to the United States without regard to the price, perhaps amounting to one of the biggest givewaways of federal resources by Congress in modern history," he said.

An Anadarko spokesman said on Jan. 13 that the appeals court's affirmation upheld clear congressional intent to assure that producers were afforded the royalty treatment granted as encouragement to make huge investments in the deepwater GOM.

Continued value

"The Deepwater Royalty Relief Act continues to provide value for American consumers in the form of energy that we and other deepwater operators have produced as well as the jobs that have been created and government revenue that has been enhanced through taxes paid, upfront bonuses paid and record-setting lease sales," he said in an e-mailed response to an OGJ Washington Pulse telephone inquiry.

Two oil and gas trade associations on Jan. 13 also applauded the US Fifth Circuit Court of Appeals ruling. The panel of judges unanimously affirmed that Congress established only a volume, and not a price, threshold when it passed the Deepwater Royalty Relief Act, American Petroleum Institute President Jack N. Gerard said in a statement.

"That act was passed at a time of historically low crude oil prices as a means to increase production and sustain jobs in a struggling industry. It was enormously successful, helping to boost Gulf of Mexico production by 50% in less than a decade. This production, which Congress considered would likely remain in the ground for years without the royalty relief program, helps reduce our dependence on foreign oil and keep jobs at home," he said.

The decision also ensures that the federal government's executive branch does not overstep authority it receives from Congress, Independent Petroleum Association of America President Barry Russell maintained. The ruling upholds the US Constitutions system of checks and balances, he said.

"The intent of Congress with the Deepwater Royalty Relief Act was to provide an incentive for companies to obtain royalty relief based on the volumes of crude oil and natural gas produced, rather than on a price threshold. [DOI] subsequently installed a price threshold that would determine when those incentives would cease. The circuit court has now found the Interior Department's actions to be outside the scope of the law," Russell said.

Contact Nick Snow at nicks@pennwell.com

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