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New York Times: Oil Company Revives Suit on Avoidance of Royalties

March 3, 2007

WASHINGTON, March 2 — One of the nation’s biggest oil producers in the Gulf of Mexico is pressing ahead with a lawsuit that could, if successful, allow energy companies to avoid as much as $60 billion in royalties to the government over the next two decades.

Anadarko Petroleum, based in Houston, is suing the Interior Department to overturn regulations that force companies that drill in publicly owned waters to pay full royalties on oil and gas they produce during times of high energy prices.

Anadarko, which earned $4.8 billion in profit last year on sales of $10.2 billion, is arguing that Congress guaranteed oil companies a special incentive for drilling in deep water under which the companies could avoid paying the standard royalty on much of what they produced in the Gulf of Mexico. The Interior Department has adamantly argued that the incentives were never supposed to apply when oil prices climbed above about $34 a barrel.

The suit itself was filed a year ago by the Kerr-McGee Oil and Gas Corporation, which Anadarko acquired last year for $21 billion. But Anadarko put the suit on hold last year and began court-supervised mediation talks with the Interior Department.

On Thursday, a federal judge in Louisiana, Patricia Minaldi, declared that the mediation talks had failed and ordered both sides to start filing arguments in late May. The failure of the mediation poses a major problem for the Bush administration, which is already trying to prevent the loss of $10 billion in royalties as a result of a huge leasing error made during the Clinton administration.

If Anadarko is successful, the government would lose many more times that. The Government Accountability Office, the Congressional watchdog agency, estimated in January that the government would lose about $60 billion over 25 years.

The federal government leases millions of acres in the Gulf of Mexico to oil and gas producers. Companies are required to pay a royalty of 12 to 16 percent of their sales from the leases, but the government also offers royalty holidays as an incentive for deepwater drilling.

The Interior Department contends that companies are not entitled to such royalty relief if oil prices climb above about $34 a barrel, as they have for the last three years.

But Anadarko, in its lawsuit, argued that Congress never authorized that kind of restriction and had “guaranteed” the incentives for any leases signed from 1996 through 2000.

“Like other companies, Kerr-McGee responded and undertook significant risks and costs associated with deepwater exploration,” the company said in its lawsuit, adding that it had invested $3.5 billion to acquire, explore and develop leases in the gulf.

The revival of the lawsuit could cause political problems for the oil industry, increasing hostility among Democratic leaders already angry about high energy prices and record industry profits.

In January, House Democrats overwhelmingly passed a bill that would revoke $7.6 billion in tax breaks for oil companies and would impose a stiff additional fee on all companies that refused to renegotiate the flawed leases signed during the Clinton years.

Representative Edward J. Markey, Democrat of Massachusetts, who has criticized the Interior Department for being lax toward oil companies, accused Anadarko on Friday of intransigence and attempting a “colossal rip-off.”

“This lawsuit is nothing more than a brazen attempt to fleece the American people out of billions of dollars,” Mr. Markey said in a statement. “The Justice Department must put the full weight of its resources behind vigorously defending the American taxpayers.”

Indeed, industry executives say that major oil companies are politically divided about the legal gauntlet thrown down by Kerr-McGee and Anadarko Petroleum.

“I think there are a lot of folks in the industry, particularly those involved in advocating the original legislation, that absolutely don’t agree with Kerr-McGee,” said John Northington, an industry lobbyist who worked in the Energy Department under President Clinton.

The Bush administration has repeatedly argued that Anadarko’s case has no merit, but Interior officials have tried at least twice to settle the dispute without going to trial.

The most recent effort was led by C. Stephen Allred, assistant secretary for land and minerals management.

In December, the two sides hired Benjamin A. Civiletti, a lawyer and onetime Watergate prosecutor, to mediate talks about a possible compromise.

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