Feds ponder appealing royalty ruling

By Chris Casteel

Published: January 12, 2008

WASHINGTON — The Justice Department has moved toward appealing a Louisiana federal court ruling that oil and gas companies don't owe royalties on certain Gulf of Mexico production until congressionally set thresholds are met.

The ruling, in a case filed by Kerr-McGee Corp. before it was acquired by Anadarko Petroleum Corp., affects numerous companies, including Devon Energy Corp. of Oklahoma City.

The Justice Department has been under pressure from some members of Congress to appeal the ruling since it would cost the government an estimated $60 billion in lost revenue if it stands.

Though the Justice Department filed a notice of appeal late last month in the Western District of Louisiana, the procedural move simply preserves the government's right to take the case to the 5th Circuit Court of Appeals; an actual appeal has not been filed.

U.S. District Judge Patricia Minaldi ruled in October that a 1995 law aimed at encouraging oil and gas companies to drill in deep water in the Outer Continental Shelf waived all royalties on leases covered by the law until production exceeded certain volumes specified by Congress.

The Interior Department contended that Kerr-McGee owed millions of dollars in royalties on eight leases because oil prices had exceeded price thresholds in the law.

Minaldi agreed with Kerr-McGee that the price thresholds didn't apply until the production volumes had been met.

Minaldi's decision angered some members of Congress, who sent a letter to the Bush administration urging an appeal. Some lawmakers were already frustrated that deepwater leases signed in 1998 and 1999 contained no price threshold provisions, and they were trying to pressure companies that signed the leases into renegotiating them or paying a "tax” if they wanted to sign future leases.

But Minaldi's decision effectively rendered the issue of 1998 and 1999 leases moot since she determined that price thresholds weren't applicable to any of the leases covered by the law until the production levels had been met.

John Christiansen, a spokesman for Anadarko, said a possible appeal by the government "does not change the facts of the case. We believe, as the lower court stated in its decision, the statute is plain and unambiguous. The Interior Department has no discretion to enact a price threshold requirement that applies to volumes below the minimum volume of royalty-free production."

In a dispute over different provisions in the same 1995 law, the government lost an appeal in 2004 in the 5th Circuit. In that case, the government contended that the royalty-free production volumes could apply to an entire field, rather than a single lease. The government also contended that a new lease could be exempted from royalty relief if it were part of a field that was already producing before the law was passed.

The government lost on both counts, and the 2004 appeals court decision was a central part of Kerr-McGee's argument in its case.

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