The US Minerals Management Service is investigating why price thresholds were absent from federal offshore leases covered by deepwater royalty relief during fiscal 1998 and 1999 but has not determined the cause, the MMS deputy director told a House subcommittee Mar. 1.
“As near as I can determine, considering it has been 8 years and there has been staff turnover, the leasing language was being revised, and the price thresholds somehow dropped out,” Walter D. Cruikshank told the House Government Reform Committee’s energy and resources subcommittee.
He said that soon after the 1995 deepwater royalty relief act was signed, then-Interior Sec. Bruce Babbitt determined there would be price thresholds from 1996 through 2000.
But thresholds were absent in 1998 and 1999. “I have looked at the documents and can see no reason why the thresholds were removed,” Cruikshank said.
He said he was not aware of written guidance to eliminate price thresholds.
“I believe that what happened was that addendums to leases were being changed to reflect new terms, and that the price threshold language was omitted at that time,” Cruikshank said. “I do not have any idea how it happened or who was involved.”
Rep. Diane E. Watson (D-Calif.), the subcommittee’s ranking minority member, cited record industry earnings and said, “Congress is justified in looking at royalty relief.”
Cruikshank defended the 1995 law. “At that time, the deepwater technologies did not exist to determine if oil and gas would be found. The act had the effect of stimulating leasing,” he said. He noted rapid production gains from deepwater projects and called royalty relief “very successful in leading the country to develop additional supplies of its oil and gas.”
Deepwater production
Deepwater production, which accounted for less than 5% of the US gulf’s total oil and 1% of its total gas output in 1990, produced more than 67% (362 million bbl) of the oil and 37% (1.5 tcf) of the gas from the region in 2004, Cruikshank said.
Deepwater production growth has more than offset declines in shallow water, allowing total US gulf oil production to grow from 283 million bbl in 1990 to 540 million bbl in 2004.
“Roughly 20% of deepwater oil production and 30% of deepwater gas production comes from leases with royalty relief, a share that will grow as leases issued over the last several years come into production,” Cruikshank said.
The MMS scaled back the amount of oil and gas covered by royalty relief in 2000 but retained price thresholds, he told the subcommittee. The Energy Policy Act of 2005 codified those decisions and added production from greater depths.
Royalty relief suspension thresholds that began in 1996 at $3.50/MMbtu for gas and $28/bbl for oil climbed to $4.34/MMbtu and $34.71/bbl in 2004 to accommodate inflation, according to Cruikshank’s written testimony.
“Clearly, it has been the department’s policy to include price thresholds,” he said.
Implementation basis
He said the MMS’s implementation for royalty relief on leases issued from 1996 through 2000 stated a lease had to be part of a field that was not producing before the royalty relief act was passed. The agency also decided to apply royalty relief to a field instead of individual leases.
Some producers disputed that approach, said Cruikshank. In 2003 a Louisiana district court held in the Santa Fe Snyder Corp. vs. Norton case that these provisions were contrary to the royalty relief act’s intent and struck them down.
The federal government appealed, but the Fifth US Circuit Appeals Court affirmed the ruling in 2004, increasing the amount of royalty relief available under the provisions.
A few producers contend that the court decision means the Department of the Interior did not have the authority to establish price thresholds on any leases from 1996 through 2000, Cruikshank said.
After the department’s acting assistant secretary issued a final decision requiring deepwater lessees to pay royalties in years when price thresholds were exceeded, one company indicated it would mount a legal challenge.
Cruikshank said that after the MMS reminded the deepwater lessees that royalties were due for all production in years when the price thresholds were exceeded in December, 28 lessees paid $338 million without dispute.
Two paid in full ($24 million), and five more partially paid ($63 million). Three others have not paid the estimated $59 million in royalties that MMS says they owe, Cruikshank said. ✦
