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The Wall Street Journal U.S. Effort to Tap Oil Profits Suffers Blow

Anadarko Prevails
In Motion to Protect
Royalty-Relief Pact
November 1, 2007; Page A12

A federal court sided with Anadarko Petroleum Corp. in a closely watched case on oil and natural-gas royalties, a development that could help the energy industry resist government efforts to revamp lucrative production agreements in the petroleum-rich Gulf of Mexico.

The federal court in Lake Charles, La., sided with Anadarko’s motion for summary judgment, ruling that the federal government couldn’t collect royalties on some Gulf of Mexico oil and gas production despite surging energy prices. Anadarko said in a federal filing last year that the royalties and interest it was fighting to protect totaled $157 million.

An attorney for the U.S. Minerals Management Service said the agency was considering appealing. “We are exploring every option, including appealing and continuing to work with Congress to resolve this,” said David Bernhardt, a solicitor for the Interior Department. “We fundamentally disagree with the district court’s conclusion.”

The case centered on whether the agency can impose price thresholds that would require Anadarko and other companies to pay royalties despite the terms of leases granted between 1996 and 2000. Under the terms of a 1995 law, drafted in a time of low prices and declining activity, oil producers were given royalty relief to stimulate Gulf of Mexico drilling.

Royalties are the percentage of revenue the federal government gets from oil and gas production. The issue of royalty payments on Gulf of Mexico oil properties owned by the federal government has attracted criticism in Congress because of high gasoline prices and record oil-company financial results.

The Interior Department has come under broad criticism from Congress over its administration of the federal royalty program in the Gulf. In a separate lease issue, some oil companies, including BP PLC and Royal Dutch Shell PLC, have agreed to royalties on some leases that had originally been granted royalty relief. Others have fought the effort.

The amount of royalties that could be affected if the Anadarko case marks a precedent is unclear. The Government Accountability Office said in a report on oil and gas royalties submitted to Congress earlier this year that “depending on the outcome of this litigation, the [Mineral Management Service] estimates that this could result in up to $60 billion in additional forgone royalty revenue.”

A congressional budget report later disagreed, saying the amount could be lower because the asset values and price assumptions are disputable.

Anadarko had said the MMS overstepped its authority when it imposed royalties on the leases acquired between 1996 and 2000. Anadarko cited the specific language of the 1995 law and a prior U.S. court ruling that restricted the government’s ability to collect royalties. “The court upheld what we believe was the intent of Congress to assure that companies were afforded the royalty treatment it granted as an incentive to make huge investments in the deep-water Gulf of Mexico frontier,” Anadarko Chief Executive James Hackett said in statement yesterday.

The case was based on a claim by Kerr-McGee Corp., which Anadarko acquired in 2006.

The case centers on the agency’s efforts to collect royalties based on the agency’s contention that it retained discretion to collect royalties during times of high prices, even under the 1995 law. But U.S. District Judge Patricia Minaldi said the agency overstepped its authority under the 1995 law, which “clearly requires minimum royalty relief,” she wrote.

“The Interior’s action is unlawful because it contradicts the plain, unambiguous text of the statute,” she said.

•  Royalty Win: Anadarko prevailed in its attempt to resist government efforts to revamp production agreements from the 1990s.

•  Setting a Precedent? The ruling could help other companies resisting federal efforts to draw royalties from those agreements in a time of high energy prices.

•  Another Round: The federal government, which argues billions could be lost, may appeal the ruling.

–Russell Gold contributed to this article

Write to John M. Biers at [email protected] and Ian Talley at [email protected] and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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