Contract sanctity surfaced as an issue as representatives of three major oil companies and a large independent producer testified about price thresholds and deepwater royalty relief before a US House subcommittee on June 21.
“It’s critical to our business decisions. Any change of prior year lease terms and conditions would indicate that the US government does not place a high value on contract sanctity,” said Tim Cejka, president of ExxonMobil Exploration Co.
“If this value is undermined here, it would have a deleterious impact on the investment climate in the United States,” he warned in written testimony submitted to the House Government Reform Committee’s energy and resources subcommittee.
He and the other three industry witnesses emphasized that producers do not negotiate terms when they compete for federal offshore oil and gas leases.
“The leases themselves are form documents prepared by the [US Minerals Management Service] without input from the lessees,” noted Paul K. Sigele, vice-president of deepwater exploration projects at Chevron North America Exploration & Production Co.
“Whenever Chevron enters into contractual arrangements with the federal government or any other partner, however, Chevron seeks to honor the terms of the contracts and generally expects the same of its counterparties,” he said in his written testimony.
“A lessee must either accept the lease as drafted or forfeit the lease and deposit, said Shell Oil Co. Pres. John Hofmeister. “Therefore, when leases are awarded, the lessee must execute the lease and return it within the time specified. There is no renegotiation but only an award of a lease to the highest qualified bidder.”
Randy L. Limbacher, executive vice-president at ConocoPhillips, said that the company was aware of controversy surrounding the absence of price thresholds from deepwater leases during 1998 and 1999.
“However, this has not been a significant issue, as our company has not been able to make use of these incentives under our 1998 and 1999 leases,” he said in his written testimony.
Reason for hearing
Subcommittee Chairman Darrell E. Issa (R-Calif.) called the hearing to investigate why price thresholds were missing during those 2 years as MMS implemented the Deep Water Royalty Relief Act of 1995.
Following the hearing, he said that representatives from Chevron and Shell said that the companies might be willing to renegotiate terms.
Hofmeister said that Shell sent MMS Director Johnnie Burton a letter on June 15 saying that it would be willing to change terms of its 1998 and 1999 deepwater Gulf of Mexico leases after she said that the omission of price thresholds was an administrative error. “We met with her yesterday to begin those discussions,” he said.
But Greg Pilcher, senior vice-president, general counsel, and corporate secretary at Kerr-McGee Corp., said that the Oklahoma City independent is not certain that omitting the price thresholds in 1998 and 1999 was a mistake.
“The plain language and legislative history of the Deep Water Royalty Relief Act indicate that [the Department of the Interior] lacked the authority to impose price triggers for leases during a 5-year period that included 1998 and 1999,” he said in his written testimony.
“It appears from the agency’s regulations that Interior had reached the same conclusion by January 1998, when it published final rules to govern these leases. Thus, Kerr-McGee does not regard the absence of price triggers from the 1998 and 1999 leases to have been a mistake,” Pilcher said.
He noted that a Kerr-McGee subsidiary has sued DOI over its efforts to apply price thresholds to the company’s deepwater leases for production during 1996, 1997, and 2000, but would not comment further.
Issa expressed disbelief at the lawsuit, saying that price thresholds were contained in the final official sale notice and lease addenda, which Kerr-McGee signed.
“I call it ‘bad faith’ if someone signs a contract voluntarily and does not object to the provisions, yet when the time comes to pay, they object and file suit. That sounds like a violation of contract sanctity to me,” he declared.
