Senator pushes oil royalty reversal

By Chris Casteel

Published: February 27, 2008

WASHINGTON — A California senator pressed the Bush administration on Tuesday to appeal a federal court decision that could cost the government more than $30 billion in royalties from oil and gas leases in the Gulf of Mexico.

Sen. Dianne Feinstein, a Democrat, told a top Interior Department official that it's "extraordinarily important” that the case, filed by the Kerr-McGee Corp. before it merged with Anadarko Petroleum, be pursued.

"I intend to persevere, and hopefully you do, too,” Feinstein said at a committee hearing on the budget for the U.S. Minerals Management Service. "This is one of the largest sources of revenue for the federal government at a time when all these programs are really stressed for dollars.”

C. Stephen Allred, assistant secretary at the Interior Department, told Feinstein that he wants the decision appealed but that the U.S. Justice Department has to make the determination.

A federal judge in Louisiana ruled in October that Kerr-McGee did not have to pay royalties on eight deepwater leases executed between 1996 and 2000 because of a law passed by Congress to encourage companies to drill in the Gulf of Mexico when energy prices were low.

The government contended that Kerr-McGee and other companies that signed leases in that time period had to pay royalties once prices for oil and gas passed certain thresholds. But the judge agreed with Kerr-McGee that the law made production royalty-free until certain volumes had been achieved.

The decision could potentially affect about 2,370 leases. The Interior Department originally estimated the potential loss of royalty revenue at $60 billion over the life of the leases, but has now cut that in half.

The Justice Department filed a notice of appeal in December with the 5th Circuit Court of Appeals to preserve its options. But no final decision has been made on whether to appeal.

Justice Department spokesman Andrew Ames said Tuesday, "We continue to review the decision and no determination has been made as to the government's next step.”

Allred told the subcomittee, "I believe we have to appeal it,” and he said the Justice Department attorneys "clearly understand the need to appeal this.”

The court decision came at a time when some lawmakers were already outraged that the Interior Department mistakenly omitted price thresholds in deepwater Gulf of Mexico leases executed in 1998 and 1999. The House last year passed language that would require companies, such as Devon Energy in Oklahoma City, to renegotiate the leases or pay a fee to be eligible to bid on future leases.

However, if the Kerr-McGee decision stands, the question of the 1998 and 1999 leases is moot because none of the leases signed under the parameters of the 1995 law would be subject to price thresholds until a certain amount of oil or gas was produced.

Allred cautioned Feinstein and other senators against punishing companies that signed the 1998 and 1999 leases but haven't agreed to pay royalties.

He said a recent lease sale in the Outer Continental Shelf yielded $2.6 billion in bonus bids. If companies that hadn't paid royalties had been excluded from the bidding, he said, there would have been far less competition and the bids would have been lower, meaning less revenue for the government.

Moreover, Allred told reporters after the meeting, punishing the companies over the royalty issue could mean less oil and gas production, which would have energy supply and national security implications.

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