5 oil and gas companies to pay royalties

Five oil and gas companies, including Shell, ConocoPhillips and BP, have agreed to pay royalties on future production under flawed drilling leases in the Gulf of Mexico, the government said Thursday.

The companies are among 59 energy producers that hold the leases at issue from 1998 and 1999. Because of a government mistake, the leaseholders have avoided royalty payments on oil and gas taken from federal waters. The leases omitted language requiring royalties when prices reached a certain level.

The agreements with the five companies are “a step in the right direction” and may lead others to find a way to rework the flawed leases, said the Interior Department’s assistant secretary, Stephen Allred.

Some members of Congress have estimated that the royalty exemptions have cost the government $2 billion. Allred put the amount at “somewhat less than $900 million.”

Congressional auditors have put the total government loss for past and potential future production under the leases as high as $10 billion.

The companies that reached agreement to begin paying royalties as of this past Oct. 1 are Shell Oil Co., BP PLC, ConocoPhillips Co., Marathon Oil Co. and Walter Oil & Gas Corp.

More than 1,040 of the leases were issued and about 570 are actively held by 59 companies, according to the Minerals Management Service, the agency that manages the leasing program. The companies that settled hold all or parts of 131 of the flawed leases.

“They’re significant players,” Allred told reporters.

He said other major leaseholders have refused to rework the deals and that some have refused even to discuss them.

Allred also acknowledged that the agreements Thursday deal only with royalties from future production and not oil and gas already taken.

“We do not believe that we have any ability to unilaterally change a contract,” he said, explaining why the department is not seeking to recover royalties already lost from production.

The refusal of most of the companies to even discuss ways to correct the error in the 1998-99 leases has produced a political firestorm in Congress.

Both Democrats and Republicans have threatened to bar companies from future Gulf of Mexico drilling leases unless they agree to renegotiate the flawed leases.

Speaker-to-be Nancy Pelosi, D-Calif., said on Thursday that resolving the matter will be a priority in the House’s first 100 legislative hours after Democrats take control in January.

Allred, however, said banning companies from future leases if they do not rework the flawed ones would lead to legal fights and significantly could reduce domestic oil and gas production.

“Our fear is that our program would shut down” if companies were banned from future lease sales, Allred said.

Reps. Henry Waxman, D-Calif., incoming chairman of the
House Government Reform Committee, and GOP Rep. Tom Davis of Virginia, the current chairman, asked Attorney General Alberto Gonzales on Thursday to review the Interior Department’s claim it cannot legally recover past royalty losses.

They cited a private law firm’s analysis that argued the government has “legal recourse to immediately seek recovery of lost taxpayer revenue” from past production under the defective leases.

“It appears that the assertions by MMS that there are no available remedies may be incorrect,” Waxman and Davis said.