Federal Royalties May Be Avoided on Part of Massive New Gulf of Mexico Oil Discovery

Oil companies are under pressure to resolve flawed drilling leases that allow them to avoid federal royalty payments, including on oil from a major discovery in the Gulf of Mexico.

WASHINGTON — Oil companies are under pressure to resolve flawed drilling leases that allow them to avoid federal royalty payments, including on oil from a major discovery in the Gulf of Mexico.

The issue stems from a mistake eight years ago that omitted a provision in more than a thousand drilling leases that would have required royalty payments but only if the price of oil went above $36 a barrel.

At the time oil was much cheaper and Congress had allowed the royalty break to spur deep-water exploration.

With oil now costing almost double the trigger level, most of those leases would be subject to royalty payments had the provision not been omitted in leases issued in 1998-99.

Chevron Corp., acknowledged that two of the eight lease areas involved in the new oil discovery it and two other companies announced last week were among those issued in 1998-99 without the royalty threshold.

The new discovery by Chevron, Statoil ASA of Norway and Devon Energy Corp. is believed to be the biggest domestic field since Alaska's Prudhoe Bay 30 years ago and could contain as much as 15 billion barrels of oil.

Chevron in a statement said "the majority of the discovered resource" including the test well is from leases subject to federal royalty payments. Oil found in two other lease blocks, however, could be exempt from lease payments, it said.

Donald Campbell, a Chevron spokesman, said those two lease areas had not yet been drilled and "any conjecture about foregone royalties for (those two blocks) is purely speculative and an academic exercise."

Chevron executives have told members of Congress that they are ready to discuss reworking the leases to resolve the royalty issue. Campbell said the company was talking with the Interior Department's Minerals Management Service and "looking for a mutually satisfactory resolution."

Meanwhile another oil giant, BP PLC, also was moving forward to try to rework the flawed leases it holds to satisfy the Interior Department as well as members of Congress.

Bob Malone, president BP America Inc., the London-based company's U.S. subsidiary, was pressed on the issue Tuesday at a Senate hearing that was primarily focused on BP's pipeline problems in Alaska.

It's time that all the companies holding flawed leases "come to the party to try to solve this problem," Sen. Pete Domenici, R-N.M., told Malone.

"We're very close to a settlement," replied Malone.

Shell Oil Co., also has said it is willing to make changes in the leases.

The oil companies, nevertheless, have argued that the leases amount to a contractual agreement and care should be taken in tampering with them.

Congress has put pressure on oil companies to come up with a compromise solution. A provision was put into an Interior spending bill that would bar any company that refused to renegotiate the flawed leases from bidding on new oil leases. The spending bill has not been given final approval.

The Government Reform subcommittee, chaired by Rep. Darrell Issa, R-Calif., is scheduled Wednesday to hold another in a series of hearings into the royalty relief controversy. The subcommittee wants to know how the mistake was made in the 1990s and why it was not quickly corrected.

Interior officials have told the panel they were not aware of the problem until 2000 or later. The department's inspector general has been investigating the circumstances surrounding the leases but no one has come up with an explanation for the mistake.

Issa said the mistake -- even not taking into account the new Chevron oil discovery -- could cost the government $10 billion in lost royalties.

Getting to the bottom of the blunder "is especially important in light of Chevron's recently announced new discovery," said a briefing paper prepared by Issa's staff for other subcommittee members in advance of the hearing.

Source: Associated Press

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