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Royal Dutch Shell Plc .com: Congress seeks $10B in oil royalties

From The Associated Press

Oil industry opposes paying 1990s error in its favor
June 21, 2006

WASHINGTON – Oil companies are under pressure in Congress to renegotiate offshore drilling leases containing a government error that could give the industry a $10 billion windfall.

The oil companies are steadfastly against renegotiating any of the lease contracts, which involve 56 companies. Last month, the House passed a provision that would bar companies from 2007 offshore leases unless they agree to renegotiate the 1998-99 contracts.

“To force companies to renegotiate under the threat of … punishment that is to be imposed through legislation … is an attack on the sanctity of contracts,” Red Cavaney, president of the American Petroleum Institute, wrote lawmakers recently.

The issue is to be the focus of two House hearings Wednesday at which oil company executives were to be questioned on why they should get a mistake-generated holiday from paying royalties when oil prices and industry profits have soared.

The cause of the trouble

The controversy stems from an error – or perhaps something more nefarious, though nothing more has been proven – in which the Interior Department failed to include in the 1998-99 leases language forcing the oil companies to pay the government royalties on the oil and gas taken if prices reached a certain threshold level.

Executives of five oil and gas companies – including Shell Oil Co., which was subpoenaed to appear – are scheduled to be questioned by the House Government Reform energy and resources subcommittee on their involvement in the questionable contracts.

Rep. Darrell Issa, R-Calif., said a five-month investigation by his subcommittee, has found “a trail of irresponsibility and gross mismanagement” in connection with the 1990s lease sales by the Interior Department.

It plans to question two Interior Department lawyers about the error.

But Issa said it’s also “crucial to examine the role of the oil and natural gas producing companies,” including “whether they ever raised issue with the omission of the price thresholds” in the 1998-99 lease contracts.

Offshore lease penalties

Later, the House Resources Committee takes up legislation that would impose significant financial penalties on any company that refuses to reopen the faulty offshore leases.

The contracts for deep-water drilling in the Gulf of Mexico exempted the companies from paying royalties as a way to stimulate exploration of the deeper areas of the gulf. That was OK as long as oil and gas prices stayed low as they did in the 1990s.

But since the leases are good for many years, the failure to include a price trigger allows the companies to avoid royalty payments even with crude prices now more than double what had traditionally been the royalty trigger.

The error could cost the government more than $10 billion in lost royalty payments over the life of the leases, according to an estimate by the Government Accountability Office, Congress’ auditing agency.

The House Resources Committee also is expected to go after the oil companies over the royalties on Wednesday.

Legislation offered by Resources Chairman Richard Pombo, R-Calif., would impose a $9-a-barrel “conservation of resources” fee on companies drilling offshore if they do not renegotiate the 1990s contracts. The fee also would apply to natural gas at the rate of $1.25 per thousand cubic feet.

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