{news} US to give away $7 Billion Royalities on Public land

[Green Party-CT]

  U.S. Has Royalty Plan to Give Windfall to Oil
Companies

By EDMUND L. ANDREWS
The New York Times, February 14, 2006
http://www.nytimes.com/2006/02/14/business/14oil.html?_r=1&oref=slogin


WASHINGTON, Feb. 13 — The federal government is
on the verge of one of the biggest giveaways of
oil and gas in American history, worth an
estimated $7 billion over five years.

New projections, buried in the Interior
Department's just-published budget plan,
anticipate that the government will let companies
pump about $65 billion worth of oil and natural
gas from federal territory over the next five
years without paying any royalties to the
government.

Based on the administration figures, the
government will give up more than $7 billion in
payments between now and 2011. The companies are
expected to get the largess, known as royalty
relief, even though the administration assumes
that oil prices will remain above $50 a barrel
throughout that period. 

Administration officials say that the benefits
are dictated by laws and regulations that date
back to 1996, when energy prices were relatively
low and Congress wanted to encourage more
exploration and drilling in the high-cost,
high-risk deep waters of the Gulf of Mexico. 

"We need to remember the primary reason that
incentives are given," said Johnnie M. Burton,
director of the federal Minerals Management
Service. "It's not to make more money,
necessarily. It's to make more oil, more gas,
because production of fuel for our nation is
essential to our economy and essential to our
people."

But what seemed like modest incentives 10 years
ago have ballooned to levels that have alarmed
even ardent supporters of the oil and gas
industry, partly because of added sweeteners
approved during the Clinton administration but
also because of ambiguities in the law that
energy companies have successfully exploited in
court.

Short of imposing new taxes on the industry,
there may be little Congress can do to reverse
its earlier giveaways. The new projections come
at a moment when President Bush and Republican
leaders are on the defensive about record-high
energy prices, soaring profits at major oil
companies and big cuts in domestic spending. 

Indeed, Mr. Bush and House Republicans are trying
to kill a one-year, $5 billion windfall profits
tax for oil companies that the Senate passed last
fall.

Moreover, the projected largess could be just the
start. Last week, Kerr-McGee Exploration and
Development, a major industry player, began a
brash but utterly serious court challenge that
could, if it succeeds, cost the government
another $28 billion in royalties over the next
five years. 

In what administration officials and industry
executives alike view as a major test case,
Kerr-McGee told the Interior Department last week
that it planned to challenge one of the
government's biggest limitations on royalty
relief if it could not work out an acceptable
deal in its favor. If Kerr-McGee is successful,
administration projections indicate that about 80
percent of all oil and gas from federal waters in
the Gulf of Mexico would be royalty-free. 

"It's one of the greatest train robberies in the
history of the world," said Representative George
Miller, a California Democrat who has fought
royalty concessions on oil and gas for more than
a decade. "It's the gift that keeps on giving." 

Republican lawmakers are also concerned about how
the royalty relief program is working out.

"I don't think there is a single member of
Congress who thinks you should get royalty relief
at $70 a barrel" for oil, said Representative
Richard W. Pombo, Republican of California and
chairman of the House Resources Committee.

"It was Congress's intent," Mr. Pombo said in an
interview on Friday, "that if oil was at $10 a
barrel, there should be royalty relief so
companies could have some kind of incentive to
invest capital. But at $70 a barrel, don't expect
royalty relief."

Tina Kreisher, a spokeswoman for the Interior
Department, said Monday that the giveaways might
turn out to be less than the basic forecasts
indicate because of "certain variables." 

The government does not disclose how much
individual companies benefit from the incentives,
and most companies refuse to disclose either how
much they pay in royalties or how much they are
allowed to avoid.

But the benefits are almost entirely for gas and
oil produced in the Gulf of Mexico.

The biggest producers include Shell, BP, Chevron
and Exxon Mobil as well as smaller independent
companies like Anadarko and Devon Energy. 

Executives at some companies, including Exxon
Mobil, said they had already stopped claiming
royalty relief because they knew market prices
had exceeded the government's price triggers.

About one-quarter of all oil and gas produced in
the United States comes from federal lands and
federal waters in the Gulf of Mexico. 

As it happens, oil and gas royalties to the
government have climbed much more slowly than
market prices over the last five years. 

The New York Times reported last month that one
major reason for the lag appeared to be a
widening gap between the average sales prices
that companies are reporting to the government
when paying royalties and average spot market
prices on the open market. 

Industry executives and administration officials
contend that the disparity mainly reflects
different rules for defining sales prices.
Administration officials also contend that the
disparity is illusory, because the government's
annual statistics are muddled up with big
corrections from previous years.

Both House and Senate lawmakers are now
investigating the issue, as is the Government
Accountability Office, Congress's watchdog arm.

But the much bigger issue for the years ahead is
royalty relief for deepwater drilling. 

The original law, known as the Deep Water Royalty
Relief Act, had bipartisan support and was
intended to promote exploration and production in
deep waters of the outer continental shelf. 

At the time, oil and gas prices were
comparatively low and few companies were
interested in the high costs and high risks of
drilling in water thousands of feet deep.

The law authorized the Interior Department, which
leases out tens of millions of acres in the Gulf
of Mexico, to forgo its normal 12 percent royalty
for much of the oil and gas produced in very deep
waters.

Because it take years to explore and then build
the huge offshore platforms, most of the oil and
gas from the new leases is just beginning to
flow. 

The Minerals Management Service of the Interior
Department, which oversees the leases and
collects the royalties, estimates that the amount
of royalty-free oil will quadruple by 2011, to
112 million barrels. The volume of royalty-free
natural gas is expected to climb by almost half,
to about 1.2 trillion cubic feet.

Based on the government's assumptions about
future prices — that oil will hover at about $50
a barrel and natural gas will average about $7
per thousand cubic feet — the total value of the
free oil and gas over the next five years would
be about $65 billion and the forgone royalties
would total more than $7 billion.

Administration officials say the issue is out of
their hands, adding that they opposed provisions
in last year's energy bill that added new royalty
relief for deep drilling in shallow waters.

"We did not think we needed any more legislation,
because we already have incentives, but we
obviously did not prevail," said Ms. Burton,
director of the Minerals Management Service.

But the Bush administration did not put up a big
fight. It strongly supported the overall energy
bill, and merely noted its opposition to
additional royalty relief in its official
statement on the bill.

By contrast, the White House bluntly promised to
veto the Senate's $60 billion tax cut bill
because it contained a one-year tax of $5 billion
on profits of major oil companies. 

The House and Senate have yet to agree on a final
tax bill. 

The big issue going forward is whether companies
should be exempted from paying royalties even
when energy prices are at historic highs.

In general, the Interior Department has always
insisted that companies would not be entitled to
royalty relief if market prices for oil and gas
climbed above certain trigger points.

Those trigger points — currently about $35 a
barrel for oil and $4 per thousand cubic feet of
natural gas — have been exceeded for the last
several years and are likely to stay that way for
the rest of the decade.

So why is the amount of royalty-free gas and oil
expected to double over the next five years? 

The biggest reason is that the Clinton
administration, apparently worried about the
continued lack of interest in new drilling,
waived the price triggers for all leases awarded
in 1998 and 1999.

At the same time, many oil and gas companies
contend that Congress never authorized the
Interior Department to set price thresholds for
any deepwater leases awarded between 1996 and
2000.

The dispute has been simmering for months, with
some industry executives warning the Bush
administration that they would sue the government
if it tried to demand royalties.

Last week, the fight broke out into the open. The
Interior Department announced that 41 oil
companies had improperly claimed more than $500
million in royalty relief for 2004. 

Most of the companies agreed to pay up in
January, but Kerr-McGee said it would fight the
issue in court. 

The fight is not simply about one company.
Interior officials said last week that Kerr-McGee
presented itself in December as a "test case" for
the entire industry. It also offered a
"compromise," but Interior officials rejected it
and issued a formal order in January demanding
that Kerr-McGee pay its back royalties.

On Feb. 6, according to administration officials,
Kerr-McGee formally notified the Minerals
Management Service that it would challenge its
order in court. 

Industry lawyers contend they have a strong case,
because Congress never mentioned price thresholds
when it authorized royalty relief for all
deepwater leases awarded from 1996 through 2000. 

"Congress offered those deepwater leases with
royalty relief as an incentive," said Jonathan
Hunter, a lawyer in New Orleans who represented
oil companies in a similar lawsuit two years ago
that knocked out another major federal
restriction on royalty relief.

"The M.M.S. only has the authority that Congress
gives it," Mr. Hunter said. "The legislation said
that royalty relief for these leases is
automatic."

If that view prevails, the government said it
would lose a total of nearly $35 billion in
royalties to taxpayers by 2011 — about the same
amount that Mr. Bush is proposing to cut from
Medicare, Medicaid and child support enforcement
programs over the same period.









       
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  info at votethornton.com
   
  Cliff Thornton for Governor- Campaign manager- Tim McKee cell (860) 324-1684 or (860) 643-2282
  National Committee member of the Green Party- Connecticut



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