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The New York Times: Government Cannot Halt Oil Incentives, Judge Rules

Published: November 2, 2007

WASHINGTON, Nov. 1 — A federal judge in Louisiana handed the oil industry a major legal victory this week, saying the government had no authority to suspend billions of dollars’ worth of drilling incentives when energy prices were high.

If upheld, the ruling could free companies from paying the government up to $60 billion in royalties for oil and gas produced in publicly owned waters of the Gulf of Mexico.

The ruling, in a lawsuit brought by Kerr-McGee Oil and Gas Corporation, is not a final verdict. But the judge flatly rejected all of the government’s arguments, not only refusing to throw out the case but also agreeing with the oil company that the government had overstepped its authority.

Oil companies won a similar suit in 2003 involving the same law, a decision that has already allowed oil companies to escape several billion dollars in royalties.

The Interior Department says it fundamentally disagrees with the decision, and said it was exploring all options to reverse it, including help from Congress.

Royalties on oil and gas have become one of the government’s bigger sources of revenue after income and payroll taxes. Last year, such royalties totaled more than $10 billion, and high oil prices are likely to drive those numbers to a new peak this year.

The Government Accountability Office, the investigative arm of Congress, estimated last year that an industry victory in the case could cost the government $60 billion over the next 20 years. But with oil prices now approaching $100 a barrel, and companies investing billions to develop new gulf fields, the losses to taxpayers could be considerably higher.

At issue in the court battle is a 1995 law aimed at increasing oil and gas production in the Gulf of Mexico. Under that law, the Interior Department allows companies that drill in deep water to avoid paying a standard royalty on oil and gas from publicly owned waters — usually 12 percent to 16 percent of sales.

But the government has also insisted that companies are not entitled to the incentive, known as royalty relief, if the market price of oil climbs above about $34 a barrel.

Last year, when oil prices were hovering around $70 a barrel, Kerr-McGee sued the Interior Department, arguing that the law allowed companies to pump royalty-free oil and gas regardless of how high prices might climb.

On Tuesday, the judge in Louisiana, Patricia H. Minaldi, rejected the government’s motion to throw out the case. In the ruling, Judge Minaldi wrote that Kerr-McGee, which Anadarko acquired last year for $21 billion, was correct and that the Interior Department had overstepped its authority. The judge also rejected all of the government’s technical justifications for the rules in the event that it lost the argument over its Congressional mandate.

A victory for Kerr-McGee would apply to more than 50 companies, including industry giants like Exxon Mobil, Chevron, BP and Royal Dutch Shell. Chevron and its partners discovered a mammoth oil field last year that would be protected, but the court battle affects thousands of leases signed from 1995 through 2000. Because it takes so long for companies to explore and then develop a deepwater oil field, the oil and gas from those leases is just beginning to flow.

Kerr-McGee sued the government last year, saying that Congress never authorized the Interior Department to impose the high-price restriction, even though lawmakers who drafted the law have often said that was their specific intent.

The Interior Department asked the judge to dismiss the case, but Judge Minaldi instead sided almost completely with Kerr-McGee’s interpretation of the law.

Democratic lawmakers in Congress have been trying to address the oil and gas royalties as part of a broader energy bill, but the House and Senate have been stalled for months by differences on royalties and other issues. The House energy bill, passed early this summer, would prohibit companies from acquiring additional offshore leases if they did not agree to pay royalties during times of high prices. In the Senate, Republican lawmakers blocked Democrats this summer from including any provisions to raise taxes on oil companies.

Court Cuts Exxon Damages

MONTGOMERY, Ala. (AP) — The Alabama Supreme Court threw out on Thursday nearly all of a record $3.6 billion verdict that the state had won against Exxon Mobil in a dispute over natural gas royalties.

In an 8-1 decision, the state’s highest court awarded Alabama $51.9 million in compensatory damages. The court threw out all punitive damages, which made up most of the $3.6 billion verdict.

The state conservation department had accused Exxon of deliberately underpaying the state for royalties from natural gas wells in state-owned coastal waters. Exxon had argued that the case was a routine contract dispute. and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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