Supreme Court rejects DOI appeal of Anadarko deepwater royalty ruling

This article contains updated information from Oct. 6.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Oct. 5 -- The US Supreme Court rejected a US Department of the Interior appeal of a lower court’s ruling in an offshore royalty case that DOI said could cost the federal government $19 billion.

Justices declined, on Oct. 5 without comment, to hear DOI’s appeal of the Fifth US Circuit Court of Appeals in New Orleans Jan. 12 ruling that Anadarko Petroleum Corp. does not have to pay $350 million of royalties on eight federal Gulf of Mexico deepwater leases it holds.

Kerr-McGee Oil & Gas Corp., which originally obtained the leases and that Anadarko acquired when it bought the Oklahoma City-based producer in 2006, argued in a legal challenge that the 1995 Deepwater Royalty Relief Act waived payments until specific amounts had been produced.

The US Department of Justice, on DOI’s behalf, argued that royalties were due because oil and gas prices climbed past thresholds. The federal government could lose up to $19 billion if other deepwater producers followed suit, DOJ attorneys said.

Responding to the high court’s action, US Interior Secretary Ken Salazar noted that the leases were issued between 1996 and 2000, and that DOI took the position under the administrations of Bill Clinton and George W. Bush that royalties should be collected once oil and gas prices reached specific levels.

“In my view, they were correct. We will work with all involved in the days ahead to determine the best way forward,” Salazar said.

The Supreme Court’s rejection of the appeal “definitely affirms” the lower court’s decision that Congress, when it passed the deepwater royalty relief act, provided that relief based on volume limits and not price, American Petroleum Institute Pres. Jack N. Gerard observed in an Oct. 5 statement.

“That act was passed at a time of historically low crude oil prices to increase production and sustain jobs in a struggling industry,” he said. “It was enormously successful, helping to boost deepwater [GOM] 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 boost our domestic supplies and keeps jobs at home.”

Gerard said that the 1995 was an example of constructive congressional legislation which encouraged development of domestic resources and achieved the desired results. “Going forward, we trust that Congress will continue to pursue constructive energy policies that benefit the American people, while resisting the urge to take steps that attempt to change the rules of the game midstream and that discourage investment,” he said.
 
But US Rep. Edward J. Markey (D-Mass.), who serves on both the House Energy and Commerce and Natural Resources committees, said the lease agreements were faulty and producers have drilled on federal offshore acreage for free as a result.

“The Supreme Court’s refusal to hear Kerr-McGee’s brazen lawsuit means that the oil industry now stands to see a geyser of tens of billions of dollars in windfall profits at the expense of American taxpayers,” he said on Oct. 5. “At a time when the federal budget is already in the red, this lawsuit means that oil companies can drill here, drill now, and pay never.”

Markey said the House has approved a bill he sponsored that would require producers holding such leases to renegotiate the terms before they would be allowed to acquire new tracts. The Congressional Research Service has concluded that the measure would protect the federal government from losses due to royalty-free drilling, he said.

“The minerals below our public lands belong to the American people and no company should be allowed to exploit them for free,” Markey said.

Contact Nick Snow at nicks@pennwell.com.

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