Royal Dutch Shell Plc  .com Rotating Header Image Senators Seek Way to Mend Faulty Oil and Gas Contracts

By: Jean Chemnick
March 27, 2007 06:54 PM EST 
Getting oil and gas companies to renegotiate their leases in the Gulf of Mexico could require a carrot, a stick — or both.

The House opted for both in January, and the companies were not happy.

The Senate is still weighing its options, including giving the industry the carrot it wants.

The government has leased 8,000 sites in the gulf, which supplies 30 percent of the nation’s crude oil and 21 percent of its natural gas. The companies that lease drilling rights pay the government royalties worth between 12 1/2 percent and 16 2/3 percent of the market value of a barrel of oil. To spur domestic production, Congress passed the Deep Water Royalty Relief Act in 1995 that gave the companies a break on paying royalties if oil prices fell below $34.73 a barrel.

However, the actual leases issued in 1998 and 1999 did not include the language about the price trigger. That mistake could cost the federal government about $10 billion in lost royalties, according to several estimates.

Out of the more than 1,000 leases signed those two years, 570 are still in effect; only 17 are producing now. Six companies — BP PLC, ConocoPhillips Co., Shell Oil Co., Marathon Oil Co., Walter Oil & Gas Corp. and Walter Hydrocarbons Inc. — have voluntarily renegotiated their leases, but 51 others have not. And to bring these companies back to the table, even their critics seem willing to give the industry what it asked for: an extension on gulf leases.

In discussions with C. Stephen Allred, the assistant secretary of interior for land and minerals management, industry representatives indicated that the lessees might renegotiate if their leases were extended beyond the normal 10 years, department spokesman Gary Strasburg said. Allred presented the idea during a Senate Energy and Natural Resources hearing on Jan. 18. He also testified that litigation over a more punitive approach could delay lease sales for up to three years and result in the loss of $13 billion in royalties and 1.6 billion barrels of oil.

Sens. Dianne Feinstein (D-Calif.) and Pete V. Domenici (R-N.M.) announced last week that they were mulling separate proposals to authorize the Interior Department to extend leases by three years in return for renegotiation.

For Feinstein, considering sweeteners for oil companies appears to be an about-face from last year. That was when she attached an amendment to the Interior appropriations bill that would have barred companies that refuse to renegotiate from bidding in the future. In an e-mail to The Politico, Feinstein said she was considering other tactics because “there may be a real possibility for litigation.”

“She hasn’t backed away from her goal at all, which is to recoup the billions that weren’t paid,” said Feinstein spokesman Scott Gerber.

Some watchdog groups were not convinced. Beth Daley of the Project on Government Oversight said Allred and Feinstein seemed to have swallowed the industry position “hook, line and sinker.”

“For decades, Congress has been caving to the industry,” she said. “As a result, the wealthiest companies on Earth have their hands in the taxpayers’ pocket.”

The approach the senators are considering stands in contrast to a bill the House passed in January that would make companies that refused to renegotiate or pay fees ineligible for future leases. That legislation spurred intense opposition from the oil and gas lobby. The American Petroleum Institute wrote lawmakers the day before the measure passed, saying the bill would discourage domestic oil production and “strike a blow at U.S. energy consumers.”

Karen Matusic, a spokeswoman for API, said industry lawyers would probably look into whether taking away a company’s bidding rights violated constitutional and contract law. (The Congressional Research Service said the provision is constitutional.)

Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.), who is expected to introduce his own measure after the April recess, has said litigation is likely no matter what Congress does. Spokesman Bill Wicker said the senator would accept the House bill if he believed it would hold up in court. “Litigation is a known risk we are unwilling to ignore,” Wicker said, especially since delays in leasing might affect the country’s oil supply.

Erich Pica of Friends of the Earth, an environmental organization that has lobbied for recouping royalties, said any delays growing out of litigation would hurt oil companies more than it would the government. He said thousands of leases now were not being drilled, so loss of production would not be a concern. The U.S. Treasury might take a small hit, he added, but nothing compared with the royalties being lost because of the faulty contracts.

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