A casualty of US political fights this year might prove to be a concept central to the most successful energy law since oil and gas price decontrol. The Deep Water Royalty Relief Act of 1995 (DWRRA) created an industry in the Gulf of Mexico. Its success far exceeds the hopes that inspired 3 years of struggle to win enactment. It has created wealth, incomes, and government revenue where otherwise there would be none. Yet the core mechanism-a delay in royalty collection to encourage risky investment-is in jeopardy.
Success of the DWRRA is beyond question. According to the Minerals Management Service, deepwater Outer Continental Shelf leases from sales held in the 5 years following enactment in November 1995 generated bonus-bid revenue exceeding $2 billion. Deepwater leasing had proceeded slowly during 1992-95 but “exploded” after DWRRA took effect, MMS says in a May report. As of last Dec. 31, there were more active gulf leases with water depths exceeding 1,000 ft than there were leases in shallower water: 4,395 vs. 3,826. Since 1995, the MMS report says, operators have drilled 980 wildcats in deep water and announced more than 126 discoveries.
Production beginning
Because of the DWRRA, deepwater production has begun where exploration might only now be starting if former Sen. J. Bennett Johnston (D-La.) hadn’t consulted industry officials in July 1992 about ways to revive gulf operations. Because of the DWRRA, which grew out of a royalty holiday idea suggested to Johnston by former Marathon Oil Co. Pres. Victor Beghini, gulf ports and shipyards have business that might only now be reviving in response to elevated prices for oil and gas-or maybe not. Because of the DWRRA, the government has revenue, Americans have energy, and industry has technology that otherwise wouldn’t exist.
Last January, however, an attentive New York Times reporter noticed in budget documents that the Department of the Interior projected revenue from deepwater leases awarded in 1998 and 1999 sharply lower than that from deepwater leases of different vintage. The reason: Leases from those years contain no oil and gas price thresholds above which royalty becomes due. Disclosure of the apparent omission came in an election year while oil and gas prices were high and producers were reporting record profits. “This irresponsibility will cost the taxpayers almost $10 billion,” declared Rep. Darrell Issa (R-Calif.) as he opened hearings on the issue last June in the Committee on Government Reform Subcommittee on Energy and Resources, which he chairs.
Oil and gas companies should not let the supposedly lost royalties obscure benefits that the DWRRA has delivered and will keep delivering for decades. Even without price thresholds, royalty relief has limits-based production volumes, which vary with water depth. Beyond those volumes, production will be subject to royalty.
Furthermore, someone at the Department of the Interior might deliberately have withheld price thresholds for fear the agency lacked authority to impose them. The part of the law that describes price thresholds refers to sections dealing with deepwater leases other than those issued in 1996-2000, when eligibility for relief was automatic. Because a major concern during development of the DWRRA was budget neutrality, drafters limited automatic eligibility to 5 years, knowing that production would start later, outside the statutory period of budget analysis. But deepwater leases in effect at the time of enactment raised a problem. Without royalty relief, some of them would have lost work to the new leases. So the DWRRA made relief available on existing leases to operators who applied to MMS and showed economic need. It also applied price thresholds.
Threshold intent
As a Kerr-McGee Corp. representative argued in Issa’s hearing, Congress might never have intended for price thresholds to apply to leases automatically eligible for deepwater relief. MMS officials have reason to worry that price thresholds in deepwater leases issued in 3 of 5 of the automatic-eligibility years are illegal.
The larger concern for the industry should be that the price-threshold controversy not discredit the DWRRA approach. The incentive worked, and the country is profiting in several ways because it did.