Deepwater royalty relief comes under fire in Congress

Feb. 27, 2006
Federal royalty relief in the deepwater Gulf of Mexico came under fire as critics charged that it will cost the US government billions of dollars at a time when crude oil and natural gas prices are near record highs.

Federal royalty relief in the deepwater Gulf of Mexico came under fire as critics charged that it will cost the US government billions of dollars at a time when crude oil and natural gas prices are near record highs.

The attacks followed a Feb. 14 New York Times article saying royalty relief could cost the US more than $7 billion in royalties from about $65 billion in production from federal offshore leases over the next 5 years under the Deep Water Royalty Relief Act of 1995.

The newspaper said it based the estimate on US Minerals Management Service projections that royalty-free oil production could reach 112 million bbl at an assumed average price of $50/bbl, and royalty-free gas could reach 1.2 tcf by 2011 at an average $7/Mcf price.

The article prompted a question that day in the White House press briefing. Press Sec. Scott McClellan reiterated that President George W. Bush has said historically that oil companies should not receive incentives “when the price of oil is where it is.”

He also noted that deepwater royalty relief was enacted during President Bill Clinton’s administration. Sec. of the Interior Gale A. Norton and others at the agency took steps soon after they arrived to impose triggers that cut off royalty relief once oil and gas prices reached certain levels, McClellan said.

Senate Energy and Natural Resources Committee members Maria Cantwell (D-Wash.) and Ron Wyden (D-Ore.) immediately asked Chairman Pete V. Domenici (R-NM) to convene a hearing on what Cantwell called “an estimated $7 billion giveaway.”

During a Feb. 16 hearing on a bill that would require the Department of the Interior to begin leasing acreage in the Outer Continental Shelf Sale 181 area of the eastern Gulf of Mexico within 1 year of enactment, Domenici said royalty relief, “which we could have spent the entire morning discussing,” would in fact be the subject of a future hearing.

“We are working on that and will be happy to discuss it with you,” responded MMS Director Johnnie Burton, who was testifying at the time.

Stimulated production

Defenders of deepwater royalty relief also began to step forward, saying the measure has stimulated production in the gulf. “Without it, simple economics will make it more likely that companies will shift their investment to overseas fields where production costs are lower,” the National Ocean Industries Association said in a Feb. 16 statement.

“This would not only seriously impinge our national energy supply, it would imperil the thousands of jobs directly or indirectly supported by gulf energy production,” NOIA said.

House Resource Committee Chairman Richard W. Pombo (R-Calif.) conceded that incentives in the 1995 deepwater law worked but added, “Oil and gas companies do not need any carrots during periods of record-high prices.” He said in a Feb. 16 statement that the committee would take steps “to determine why the 1995 act was not implemented consistently.” Pombo and Energy and Minerals Subcommittee Chairman Jim Gibbons (R-Nev.) sent a letter the day before to Norton seeking more information.

Pombo’s allegation of inconsistent implementation stems from the MMS’s not including price thresholds when it offered deepwater leases in the gulf during 1998 and 1999.

NOIA said in its statement that deepwater royalty relief price thresholds existed from 1995 through 1997 but were absent in 1998 and 1999 because a formal rulemaking that included them took 2 years to complete. “The thresholds kicked back in on leases for 2000 and later,” it said.

The trade association also noted that when MMS determines that oil and gas prices have gone above a threshold, producers are notified and must either pay or contest the calculation.

“To date, about three companies have not paid their required royalties for a total sum of about $60 million. Compared to the nearly $5 billion in royalty revenue generated from offshore leases annually, this is hardly a tremendous amount,” it said.

NOIA also pointed out that royalty relief usually is in place only during the first few years of production, after which producers pay full royalties.

“Judging the merit of a well’s return to the government demands taking a long-term view, not a snapshot assessment at this particular moment in history,” it said.