Government Could Lose Billions to Oil Industry on Royalties

Oil companies may receive a $53 billion boon thanks to a royalty relief package designed to enhance the appeal of drilling in the Gulf of Mexico, according to a draft of a new Government Accountability Office report obtained by Politico.

The break on royalties stems from the Deep Water Royalty Relief Act passed in November 1995 by a Republican Congress seeking to encourage oil companies to drill in sections of the Gulf of Mexico that were more than 200 meters deep.

The watchdogs at the Project on Governmental Oversight, which have long followed the issue, have more details:

The law was intended to provide incentives for more costly drilling in deeper areas of the Gulf by allowing companies to avoid paying royalties for specific volumes when oil prices were below certain thresholds. However, for leases issued in 1998 and 1999, the price thresholds were errantly omitted, and the price of oil has since increased dramatically, now surpassing four times the original thresholds.

Once the threshold omissions were revealed publicly in 2006, Interior sought to renegotiate the faulty leases with the oil companies. A small number agreed, but the vast majority of them are holding out. Congress has also made several attempts to address the issue but without much success. This relative inaction is partly due to a lawsuit brought by Kerr-McGee (now owned by Anadarko) in March 2006 against the Department of Interior, which if won, could result in the government losing royalties on virtually all deepwater leases. The federal court sided with Kerr-McGee (pdf) in a ruling last year, but Interior has since appealed.

As POGO pointed out, a 2006 Interior Inspector General investigation showed that between 1998 and 1999 the Mineral Management Service issued roughly a thousand leases to oil companies without price thresholds.

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