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Bloomberg: Senate May Extend Botched Drilling Leases in Return for Fees

By Jim Efstathiou Jr.

March 20 (Bloomberg) — Energy companies with Gulf of Mexico drilling leases that omit royalties should get incentives in exchange for starting to make payments, U.S. Senator Dianne Feinstein said.

The leases, issued in 1998 and 1998 by the U.S. Minerals Management Service, lack terms included other years that require royalty payments when oil and natural gas prices rise. The omission, which the inspector general for the U.S. Interior Department found to be a mistake, might cost up to $10 billion, according to the Government Accountability Office.

Six of about 50 companies holding the leases, including Royal Dutch Shell Plc and BP Plc, have agreed to pay royalties on production starting Oct. 1, 2006. Feinstein, a California Democrat, said other companies should be offered lease extensions in return for drilling fees.

“The idea is extending the ’98 and ’99 leases for those companies that agree to pay royalties,” Feinstein, who chairs the Senate Appropriations Subcommittee on the Interior, said at a hearing today. “In other words, to provide some incentive to pay.”

Feinstein’s plan stands in contrast to a House bill passed in January that would bar companies holding the 1998 and 1999 leases from new drilling contracts unless they agree to pay royalties. That solution could trigger lawsuits from the oil companies, said U.S. Senator Larry Craig, a Republican from Idaho.

“These are valid contracts,” Craig said. “Contract law is sacred. That’s what we’re all struggling with here.”

Waiting for Congress

About 40 companies holding the botched leases account for about 80 percent of the royalties that would be due, Interior Secretary Dirk Kempthorne told the committee. The Interior Department oversees the Minerals Management Service.

“I believe that those companies are waiting to see if in fact there’s going to be action taken by Congress,” Kempthorne said. “I don’t believe at this time, even though discussions continue, we’re seeing any movement beyond those six.”

Senator Pete Domenici, a Republican from New Mexico, said he favors extending leases by three years for companies that volunteer to pay royalties.

To contact the reporters on this story: Jim Efstathiou Jr. in Washington at [email protected] ; Tina Seeley in Washington at [email protected] .
Last Updated: March 20, 2007 11:59 EDT

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