Former senator sees pitfalls in deepwater royalty measure

A former US senator who helped formulate federal deepwater leasing incentives in the early 1990s warned that imposing price thresholds now on 1998-99 Gulf of Mexico leases could create major legal problems.

Nick Snow
Washington Editor

WASHINGTON, DC, Nov. 8 -- A former US senator who helped formulate federal deepwater leasing incentives in the early 1990s warned that imposing price thresholds now on 1998-99 Gulf of Mexico leases could create major legal problems, delay further leasing, and encourage other countries to break agreements with US producers.

"I hope that Congress will not adopt punitive legislation and thus put existing production at risk, put US investment abroad at risk, or create huge liabilities from the government's contract breach and taking of property without just compensation," said John B. Breaux in a Nov. 6 letter to current Senate Energy Committee Chairman Max Baucus (D-Mont.) and Ranking Minority Member Charles E. Grassley (R-Iowa) on behalf of the Ad Hoc Deep Water Exploration and Production Coalition.

Breaux, who became senior counsel in Patton Boggs LLP's Washington office in 2005 after three Senate terms as a Democrat from Louisiana, noted that a federal district court confirmed last week in Kerr-McGee Corp.'s lawsuit that for federal deepwater leases issued during 1996-2000, "companies finding commercial quantities of oil or gas could produce up to a specified volume free of royalties."

The court also ruled that Congress did not authorize the US Department of the Interior to make prices remaining below explicit price thresholds for existing leases a condition for royalty relief, he added.

Producers paid about $1.5 billion in premiums as bonus bids for the 1998-99 deepwater leases because they did not have price thresholds, according to Breaux. "In addition, companies buying leases in the open market paid substantially more to acquire them from third parties," he said in his letter. "The industry has since invested tens of billions of dollars in exploration and production efforts based on economic models relying on the availability of royalty relief."

Range of consequences
Passing legislation now that would directly or indirectly impose price thresholds on those leases would result in legal challenges as an unconstitutional taking without just compensation under the US Constitution's Fifth Amendment as well as a breach of contract, Breaux warned.

"An adverse ruling could subject the government to injunctive and declaratory relief, and billions of compensatory damages. Given the court's decision for summary judgment in the Kerr-McGee litigation, Congress should know that a lawsuit is likely," he said.

Punitive royalty recovery legislation also could halt new leasing activity until legal challenges are resolved, he continued. "Injunctive relief could block all further leasing in the Gulf until the constitutional issues are resolved. Cessation of leasing and the loss of future revenues is not in our national interest now," he said.

Finally, Breaux said, enactment of such legislation could embolden resource-rich foreign countries to break similar contracts that companies have relied upon to invest hundreds of billions of dollars to explore in new regions. "In fact, we've already seen that happen in Venezuela and Nigeria," he said. "This will ultimately put US investments abroad at greater risk."

Contact Nick Snow at nicks@pennwell.com.

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