Kerr-McGee sues MMS over deepwater royalties

March 21, 2006
Kerr-McGee Corp. filed a lawsuit against the US Mineral Management Service and the Department of the Interior saying the government improperly tried to impose price thresholds on production volumes Congress intended to be royalty-free.

By OGJ editors
HOUSTON, Mar. 21 -- Kerr-McGee Corp. filed a lawsuit against the US Mineral Management Service and the Department of the Interior saying the government improperly tried to impose price thresholds on production volumes Congress intended to be royalty-free.

A lawsuit filed Mar. 17 in the US District Court, Western District of Louisiana, concerns the Deepwater Royalty Relief Act of 1995. Earlier this year, Interior officials ordered Kerr-McGee to pay royalties for oil and gas production on eight deepwater leases covered by the act.

Kerr-McGee argues that the law intended for production from the leases in question to be free of royalty without regard to price thresholds up to specified volumes. It says production from those leases hadn't yet reached those minimum levels when MMS made its royalty claim.

The Oklahoma City company has invested more than $3.5 billion to acquire, explore, and develop deepwater Gulf of Mexico leases. A deepwater well can cost nearly $100 million and have a 25% chance of yielding a commercial discovery, the lawsuit said.

Kerr-McGee attorney Lawrence Simon pointed to a 2003 federal court decision in a case involving limits of MMS's discretion over royalties, saying it presents "controlling precedent in this proceeding."

In that case, three producers, Devon Energy Corp., Ocean Energy Inc., and Santa Fe Snyder Corp. (now part of Devon) successfully sued Interior in July 2000 when MMS tried to collect royalties from a Mississippi Canyon lease issued in 1997. The companies argued that MMS ignored the intent of Congress by arbitrarily deciding that new production relief should be based on a field instead of a lease (OGJ, Jan. 27, 2003, p. 31).

Gregory F. Pilcher, Kerr-McGee senior vice-president said, "We believe that by making royalty relief conditioned upon commodity prices for oil and natural gas remaining below price thresholds, the government has disregarded the clear terms" of the deepwater royalty relief measure.