A Supreme Court decision upholding the meaning of a law does not represent legislative malfunction in need of repair. Oil and gas producers, however, might yet have to argue the point.
In refusing on Oct. 5 to review an appellate court's decision backing Anadarko Petroleum Corp. in a dispute over deepwater royalty relief, the high court provided a reminder that law is the law. To some lawmakers, however, laws favoring oil and gas producers are unpalatable.
The case
The case addressed eight deepwater leases issued in 1996, 1997, and 2000 to Kerr-McGee Oil & Gas Corp., now part of Anadarko. Because of their issue dates and water depths, the leases automatically qualified for suspension of federal royalty under the Deep Water Royalty Relief Act of 1995. Automatic eligibility applied to leases awarded in the 5 years ending in 2000.
Dispute centered on inclusion by the US Minerals Management Service of price thresholds in deepwater leases issued in 1996-97 and 2000. The move suspended royalty relief when oil and gas traded below the thresholds. When the Department of the Interior in 2006 ordered Kerr-McGee to pay royalty on the eight leases for high-price periods after 2002, the company sued, arguing price thresholds lacked statutory basis. Deepwater leases issued in 1998-99 contained no price thresholds.
The law, in fact, specifically authorizes price thresholds for leases issued before 1996 and after 2000. For 1996-2000 leases, however, it limits royalty relief by production volume rather than price.
So why did Congress treat deepwater leases issued in 1996-2000 differently from those issued before and after that period? The answer lies in budget-neutrality rules in place at the time the legislation was passed. Sponsors created a 5-year window for automatically eligible deepwater leases, knowing production wouldn't start until after the window closed. They thus dodged the need to offset forgone royalty with new revenue.
Because lawmakers didn't want relief available with new leases to pull exploration and development away from existing leases, the law allowed holders of leases in effect at the time of enactment to apply for royalty relief on the basis of economic need. But it made that relief, as well as relief provided at MMS's discretion after 2000, subject to price thresholds. The section of the law dealing with leases issued in the 5-year automatic-eligibility window sets volume limits and doesn't mention price thresholds.
These distinctions make clear that the intent of the law was to stimulate deepwater investment by making royalty relief, subject only to volume limits, automatically available for 5 years. And the clear result is success. The law accelerated development of a now-thriving deepwater industry vital to energy supply, prosperity, and technology. For producers and for the US, it was a good deal. And refusal by the Supreme Court to hear Interior's last appeal means the deal Anadarko and other producers thought they had is the one the government must uphold.
Industry antagonists in Congress will take a different view. According to press reports, for example, Rep. Ed Markey (D-Mass.), complained after the Supreme Court decision that the oil and gas industry "stands ready to see a geyser of tens of billions of dollars in windfall profits at the expense of American taxpayers." Estimates of the ultimate value of deepwater royalty relief vary greatly, depending as they must on forecasts of production and prices.
Political threat
In the past, Markey has sought to exclude producers from federal leasing unless they either renegotiate deepwater leases containing royalty relief not subject to price thresholds or pay special fees. His first effort failed. But a kindred idea appears in the administration's budget proposal in the form of a new Gulf of Mexico production tax designed to offset deepwater royalty relief.
A Supreme Court victory thus will reinvigorate a political threat to oil and gas producers. Two important questions lie at the center of the issue: Does Congress mean what it says when it writes laws? And how much confidence can anyone have in deals with the US government?
Producers shouldn't hesitate to ask them.
More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles