Five Gulf of Mexico producers agreed to pay royalties on their 1998 and 1999 deepwater leases that were originally issued without price thresholds, the US Department of Interior announced on Dec. 14.
BP PLC, ConocoPhillips, Marathon Oil Corp., Shell Oil Co., and Houston independent Walter Oil & Gas Corp. signed agreements under which they will pay royalties for production from Oct. 1 onward, said C. Stephen Allred, DOI assistant secretary for land and minerals management.
“While these agreements we signed today are a step in the right direction, we look forward to continuing to work with Congress on this issue,” Allred said. “We appreciate and commend these companies for voluntarily signing these lease amendments. We encourage the remaining companies that have not yet agreed to sign to join us in resolving this issue.”
Leases issued under the Deepwater Royalty Relief Act of 1995 included an incentive suspending royalties until a specific amount was produced to encourage producers to explore in areas where costs were high. The incentive did not apply if prices reached a certain level in most years, but was apparently accidentally omitted for leases issued during 1998-99.
Members of Congress demanded that the US Minerals Management Service move aggressively to correct the error when it was discovered early in 2006 and recover revenues that were lost due to the oversight, but some lessees argued that being forced to renegotiate would violate contract law. After consulting with DOI lawyers, MMS Director Johnnie Burton asked holders of the 1998 and 1999 leases to voluntarily renegotiate terms.
US House members came within two votes of amending the Senate’s Outer Continental Shelf leasing reform bill on Dec. 8 and inserting language which would have required holders of the 1998 and 1999 deepwater leases to renegotiate if they expected to bid on future federal OCS tracts. While the vote fell short and the OCS bill passed both the House and Senate, it clearly signaled that deepwater royalty lease renegotiation was a major issue with lawmakers.
Allred said few US deepwater leases produced oil and gas before Oct. 1. “I am pleased at the progress we are making on resolving this issue. While the omitted price thresholds did not occur during this administration, we are continuing to work to resolve this difficult problem in a manner that ensures the American taxpayer receives a fair rate of return,” he said.