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

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

 

By EDMUND L. ANDREWS

Published: February 14, 2006

 

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 a 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.

 

continued

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