Congress and royalties

Dec. 3, 2007
Braying in Congress about a court decision on deepwater royalty relief looks more like blame-shifting than serious concern for federal revenue.

Braying in Congress about a court decision on deepwater royalty relief looks more like blame-shifting than serious concern for federal revenue.

Forty-three senators have sent US President George W. Bush a letter asking what his administration will do about royalty revenue they consider lost (OGJ, Nov. 26, 2007, p. 29). He might start by asking senators and representatives to get their facts straight and learn how to write law.

The oil industry has reason to encourage such an effort. Congress is blaming it, too, for a problem that stems—if it really exists—from legislative ineptitude.

Authority questions

The senators wrote Bush after an Oct. 30 ruling in a federal case involving price thresholds in deepwater leases issued in 1996-97 and 2000. The suit, filed by Kerr-McGee Oil & Gas Corp., now part of Anadarko Petroleum Corp., argued that the Deepwater Royalty Relief Act of 2005 didn’t give the Department of the Interior authority to limit royalty suspension with anything but production caps in leases issued in the 5 years after enactment. The judge agreed.

The ruling comes while lawmakers remain angry about deepwater leases issued in 1998-99 without price thresholds. Interior officials have been excoriated in congressional hearings on the omissions, which occurred in a different administration for reasons that remain unclear.

The senators’ letter to Bush calls the decision in the Kerr-McGee case “an apparently successful attempt by the oil industry to overturn the requirement in law that they pay royalties when oil and gas prices are above certain threshold levels.” But the court saw no such requirement for 1996-2000 deepwater leases.

Indeed, the law treats those leases differently than it does leases issued before enactment and those issued after 2000, when the program reverted to administration by Interior’s Minerals Management Service. The short section on 1996-2000 leases contains a clause specifying minimum production volumes for the suspension of royalty relief. It says nothing about price thresholds and in fact contains wording that suggests lawmakers intended production amounts to be the only limit on relief during the 5 years in question.

If that wording in fact conflicts with congressional intent, the fault doesn’t lie with an industry trying “to overturn the requirement in law,” as the senatorial letter alleges. It lies instead with lawmakers who didn’t make “the requirement in law” clear in the first place.

Ultimately, the Supreme Court might decide what the law means. Meanwhile, lawmakers agitated by the court decision should quit exaggerating the cost. The letter to Bush cites an estimate made last year by the Government Accountability Office that a decision favoring Anadarko could keep $60 billion out of the federal Treasury.

That number appears frequently in news reports and statements by politicians. Yet last April GAO called it too high. GAO initially relied on an MMS estimate made in October 2004 but later determined that MMS had overestimated lifetime production volumes of affected leases. “MMS officials agreed with this assessment and said that an updated estimate of foregone revenue from these leases might be considerably lower than the $60 billion figure but that they are not currently working to develop a revised estimate,” GAO said.

So the supposedly lost revenue won’t be anywhere near $60 billion. That MMS hasn’t produced a new estimate is no excuse for repeating a known mistake. Doing so amplifies a controversy that’s being distorted to smear an industry that has done nothing wrong. For many lawmakers, of course, smearing the oil business is the whole point.

Royalty concern

The real measure of congressional concern about royalty revenue is oil and gas leasing. The US government denies or restricts access to acreage representing a technically recoverable resource estimated by the Interior Department at 40 billion bbl of oil and 250 tcf of natural gas. With $90/bbl oil and $7/Mcf gas, that’s potentially $670 billion in royalty alone. Where’s the outrage over that foregone revenue and the associated boosts to national prosperity and energy supply?

Congress should improve more than its handling of facts and writing of laws. Its priorities need work, too.