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Bloomberg: Shell, BP, ConocoPhillips Agree to Pay Fees on Leases (Update1)

By Jim Efstathiou Jr.

Dec. 14 (Bloomberg) — Royal Dutch Shell Plc, BP Plc, ConocoPhillips and Marathon Oil Corp. reached agreement with the U.S. Minerals Management Service to pay oil and gas royalties under botched Gulf of Mexico leases from 1998 and 1999.

The companies are among a group of about 50 oil and gas producers holding leases that omitted price triggers needed to ensure payment of royalties when energy prices rise. Congress narrowly defeated a measure last week that would have forced the companies to renegotiate the contracts.

Stephen Allred, assistant secretary for land and minerals management at the Interior Department, said voluntary agreements between the companies and the government could avoid a heavy- handed legislative solution that would discourage domestic energy production. He announced the agreements today in a conference call with reporters.

“These companies have a choice of whether they step up and do this or not,” Allred said. Companies that reject the voluntary solution may “contribute to the kind of solution some in Congress would like to impose.”

Chevron Corporation, after “extensive discussions,” chose not to join the agreement, Allred said. Talks continue with Exxon Mobil Corp., Kerr-Mcgee Corp. and others.

“I hope this is the first group that would sign,” Allred said. “I wish there were more of them.”

The Government Accountability office estimates that missteps on about 1,000 drilling leases could cost the government up to $10 billion in fees through 2029. The six companies have agreed to pay royalties on production from Oct. 1, meaning that about $900 million in fees on earlier production will be forgone, Allred said.

Investigations

The disputed leases failed to include a trigger that would require royalty payments during times of high oil prices. Had price triggers been included in the original leases, royalties would have been due on oil produced beginning in 2004.

The Minerals Management Service, the division of the Interior Department that oversees Gulf of Mexico oil and gas drilling, is under investigation by Congress and the Interior Department’s inspector general for the 1998 and 1998 leases. A separate probe is examining the agency’s overall handling of royalty revenue.

The probes have raised questions over Minerals Management Service Director Johnnie Burton’s attempts to address the leases. Secretary of Interior Dirk Kempthorne appointed Allred in October to oversee the Interior Department’s land and minerals management division and the flawed leases.

Burton’s Role

U.S. Representative Darrell Issa, who chaired the House Subcommittee on Energy and Resources in the last Congress, said Burton may have misled Congress in testimony on the matter.

Burton told House Government Reform Committee on Sept. 14 she first learned of the mistake early this year. Others within the agency, such as the third-ranking official at the time, were responding to company queries about the leases in 2004, according to people who asked not to be named.

Burton was “less than forthcoming” when she testified, said Issa, a California Republican. “Johnnie Burton became part of the coverup.”

Last week, the Interior’s inspector general said the agency can’t verify that the government is receiving full payments from companies drilling on federal land and in the Gulf of Mexico. The agency, which collected $12.8 billion in mineral royalties this year, relies too heavily on company-reported information in determining whether proper royalties are paid, said a report from the Inspector General.

About 17 of the disputed leases are producing oil or natural gas, Allred said. Discoveries have been made on another 25 leases.

Earlier this year, the House passed a measure that would require companies to renegotiate the flawed leases before they could sign new contracts to drill on federal land. The proposal stalled in the Senate.

Last week, the House rejected by a vote of 207 to 205 a proposal to include the royalty provision in a bill that expands drilling in the Gulf of Mexico.

Forcing companies to renegotiate their contracts could prompt lawsuits, Allred said.

“We believe that would have created a situation where we would have been in court with major oil companies who would have been prevented from entering bids,” Allred said. “Our fear is that our program would have been shut down.”

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

Last Updated: December 14, 2006 18:10 EST

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