UpstreamOnline: Senate backs end to royalty relief

By Upstream staff

Approval to halt price-linked tax break for Gulf of Mexico players

The US Senate has approved an amendment to the Defense Appropriations Bill that would end royalty relief for companies producing in the Gulf of Mexico when oil and gas prices exceed certain levels.

The amendment, penned by Republican Senator Jon Kyl of Arizona, was offered in response to a clerical error that has allowed certain leases from the late 1990s to gain royalty holidays outside set pricing thresholds.

“It is completely unnecessary to continue granting this exemption to the oil industry when gasoline and natural gas prices have skyrocketed and oil companies are earning record profits,” said Kyl.

“The resulting billions in new federal revenue from ending the royalty holiday can help fund research into promising new technologies.”

The amendment requires the Secretary of Interior to include price thresholds in all oil and gas lease terms that include royalty relief, thus ensuring payment of royalties when oil prices are moderate or high.

The secretary would determine price threshold levels.

The amendment also reaffirms the authority to include thresholds in all leases issued between 1996 and 2000, rejecting the argument by some oil companies that the secretary did not have the authority.

The Senate is expected to resume consideration of the defence spending bill in September following a month-long recess.

While the Kyl amendment confirms the Interior Department’s authority, it stops short of requiring companies that continue to enjoy relief on production leases issued in 1998 and 1999 to renegotiate terms.

The government estimates that those leases have cost the federal treasury about $2 billion in lost revenue, while the Government Accountability Office estimates the total cost to taxpayers, over the life of the leases, could increase to $10 billion.

A few operators, including Shell and Chevron, have met with the Interior Department to discuss the leases.

Meanwhile, the House Government Reform Committee, which is investigating those leases, last week suggested that the Interior Department is intentionally withholding “critical information”, thus obstructing their investigation.

“Though we have made significant progress in this investigation, we are deeply concerned that the department may have intentionally withheld critical information from the sub-committee,” said committee chairman Tom Davis, a Virgina Republican, in a letter to Interior Secretary Dirk Kempthorne.

“If this is the case, then it has intentionally impeded this duly authorised Congressional investigation.”

Davis and investigations sub-committee chairman Darrell Issa, a California Republican, have gone as far as to suggest the threshhold text may have been delibrately removed from the late 1990s lease documents, thus setting up big paydays for oil companies.

The Interior Department has said it will co-operate with the reform committee probe.

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