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Royal Dutch Shell Plc .com: Shell Willing to Change Gulf of Mexico Leases That Omitted Fees


June 21 (Bloomberg) — Royal Dutch Shell Plc, the world’s third-largest publicly traded energy company, said it would be willing to renegotiate U.S. Gulf of Mexico oil and gas leases that left out provisions that would have resulted in billions of dollars in royalty fees.

Shell in a letter to the U.S. Interior Department last week offered to “make a change in our 1998 and 1999 leases by considering the addition of price thresholds” that would trigger royalty payments when oil and gas prices are high, John Hofmeister, president of Shell’s U.S. arm, said today in prepared testimony for a U.S. House of Representatives hearing.

Contracts to drill for oil and natural gas in the deeper waters of the Gulf of Mexico signed in 1998 and 1999 inadvertently omitted provisions to impose royalty payments when prices are high, according to the Interior Department’s Minerals Management Agency. The error could end up costing the federal government as much as $10 billion in drilling fees.

The House last month passed a bill that would bar companies that refuse to fix their leases from future drilling contracts on federal lands. A second legislative fix under consideration would impose a “conservation” fee on oil and gas drillers that might be higher than royalty obligations if they fail to renegotiate.

The loophole that allows companies to avoid paying royalties stems from a 1995 law called the Deep Water Royalty Relief Act. Former Senator Bennett Johnston, a Louisiana Democrat who chaired the energy committee when the legislation was drafted, said the intent of the bill was to cut royalties when energy prices were low, to foster U.S. offshore production, and increase them when prices rise.

In a March 20 interview, Johnston said his legislation “was not the most clearly written statute in the world.” Johnston, who now works as a lobbyist for the American Petroleum Institute, last week said that the lack of price thresholds in the 1998 and 1999 leases “ought to be fixed.”

U.S. Energy Secretary Samuel Bodman has said the original contracts should be honored. He also said he hopes the companies will voluntarily renegotiate their leases.

“It is clear that the oil and gas companies that did sign contracts by and large have done exceedingly well,” Bodman told reporters last week. “The prices that they’re realizing for products are, I would guess, well in excess of that which they had anticipated and I hope they would take that into account.”

BP Plc, Europe’s biggest oil company, operates the best- performing deep water field of the nine that are producing oil and natural gas under disputed contracts. The Horn Mountain field, in which Occidental Petroleum Corp. has a 33 percent interest, has pumped 49.5 million barrels of oil and 43.5 billion cubic feet of gas since 2004, according to David Pursell, a principle at Pickering Energy Partners in Houston.

To contact the reporter on this story:
Jim Efstathiou Jr. in Washington at
[email protected].

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