From: John Heilprin, Associated Press
Published September 15, 2006 12:00 AM

Interior Officials Say Deal Near on Getting Oil Royalties

WASHINGTON — The government says it is near agreement with BP PLC and Shell Oil Co. to recoup some of nearly $10 billion in lost royalty revenue from improperly prepared oil and gas leases.


Senior Interior Department officials told a House committee Thursday the companies are among 10 they're in negotiations with because the leases didn't include clauses requiring royalty payments for oil selling above $36 a barrel.


"I believe we're very close with Shell and BP," R.M. "Johnnie" Burton, who took over as head of Interior's Minerals Management Service in 2002, said during a hearing before the House Government Reform Committee. "They are thinking about it."


Deputy Interior Secretary Lynn Scarlett said the department developed "proposed terms" and spoke with 20 of about 55 energy companies that have interests in the leases.


Bob Malone, president of BP America Inc., a subsidiary of the London-based company, had told a Senate panel Tuesday that "we're very close to a settlement." Shell Oil also has said it is willing to make changes in the leases.


Republicans and Democrats shared equally in the outrage over the loss of billions of dollars in lost royalty payments because of what Interior officials have termed a "mistake" in the lease agreements.


The House committee's chairman, Rep. Tom Davis, R-Va., said he wasn't satisfied by the department's explanations.


"It just looks to me like there needs to be adult supervision across-the-board. Am I missing something?" Davis said. The Interior Department might be in a better position, he said, "if we had disclosed these problems ... instead of hiding them for five years."


The leases were negotiated during President Clinton's second term when oil prices were ranging between $10 and $20 a barrel. The idea then was to encourage companies to drill in deep waters by waiving the normal 12 percent royalty as long as prices were low.


Since then, oil and gas prices have soared, ranging recently between $65 and $75 a barrel, but oil companies aren't pay royalties on some of their deep-water production because trigger clauses were omitted from the 1998 and 1999 lease agreements.


"This is one of the worst cases I think I've ever heard of. I'm just stunned," said Rep. John Duncan, R-Tenn. "If we just let this go by, excusing it as classic bureaucratic bungling, then we've accepted something we shouldn't accept."


The Government Accountability Office, which is investigating Burton's agency, estimated the error will cost the government nearly $10 billion in lost royalty revenues, not including new oil discoveries in the Gulf of Mexico being developed under a lease from those years.


"We are not sure what happened. We did look at it," said Burton, who chalked up the error to a breakdown in communications at her agency. "What I wanted to know is if that miscommunication was intentional or not."


Burton said she didn't learn of the error until this year. "I don't think the ranks realized it was an issue they needed to tell me about," she said.


Rep. Darrell Issa, R-Calif., took a dimmer view. He attributed the error to "a culture of irresponsibility, unaccountability that pervades the entire department."


After the hearing, Issa said in an interview that while it doesn't appear any law was broken, "it is clearly a violation of the intent of Congress."


He said the government could get as much as $2.5 billion each from some of the major companies under the 1998-99 leases, including BP PLC, Shell Oil Co., Chevron and Kerr McGee Corp. Kerr-McGee has challenged the price thresholds in a lawsuit against the agency.


Some Democrats called for a criminal investigation. "Obviously, there's an element of fraud or malfeasance here," said Rep. Dennis Kucinich, D-Ohio.


Rep. Edward Markey, D-Mass., said he was pessimistic about any deal with oil companies. "We will have a solution to the Middle East before you have an agreement from Shell and BP for a $36-a-barrel threshold," he said.


Source: Associated Press


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