Billions at stake in lawsuit over Gulf oil and gas royalties

Oil and gas companies could get a windfall of billions of dollars if they win a lawsuit against the government over disputed royalty payments from deep-water leases in the Gulf of Mexico, a congressional report said Thursday.

The report said the amount of money at stake is likely to be substantially less than the $60 billion estimated by the Interior Department because many of the leases have expired or show little evidence of producing large volumes.

Nevertheless, said the Government Accountability Office, royalty losses could be substantial if the government loses in the dispute. The GAO provided the analysis in a report to the Senate Energy and Natural Resources Committee, which made it public Thursday.

Sen. Jeff Bingaman, D-N.M., the committee’s chairman, said the uncollected royalties n and potential losses arising from ongoing litigation n is a serious matter and that he was looking for ways “to recover the lost funds.”

Congress decided in the 1990s to exempt oil and natural gas produced from very deep areas of the Gulf of Mexico from federal royalty payments. The royalty break was aimed at spurring energy exploration and development in such deep waters using cutting-edge technology.

The Interior Department has maintained that the law provided for royalties to be paid if oil and gas market prices reached a certain level n a threshold exceeded in recent years because of the rise in energy prices.

While the threshold language was omitted by mistake in leases issued in 1998-99, it was included in the years 1996, 1997 and 2000.

Most of the companies holding the leases have rejected demands that they rework the flawed 1998-99 leases. Kerr-McGee, a major lease holder, last year in a lawsuit challenged the legality of the threshold in all the leases issued over the five years.

The GAO report released Thursday said that lost revenue from the flawed 1998-99 leases already has totaled about $1 billion and could amount to between $6.4 billion and $9.8 billion in losses from future production.

Those losses could pale in comparison to the foregone revenue should Kerr-McGee wins its lawsuit, the GAO said. That would mean the government couldn’t collect revenue on any of the leases issued from 1996-2000.

The GAO said if the government loses in court it would have to pay back another $1 billion already collected under those leases and forego payments on any future production.

Interior’s Minerals Management Service, which oversees the lease program, has estimated those losses at as much as $60 billion over the life of all the leases.

The GAO said that number might be considerably lower because the agency’s initial analysis last fall likely overestimated expected production from the leases involved.

For example, of the 2,369 leases issued in 1996, 1997 and 2000, 1,294 have expired without ever producing oil or gas, the GAO said. Many of the remaining leases have yet to be explored for oil or gas, it said.

The Interior Department has reached agreement with five oil and gas companies over royalties on future production on the 1998-99 flawed leases, although those agreements could be affected by the Kerr-McGee lawsuit. Nearly 50 other companies have refused to rework any of the leases.

Earlier this year, the House passed legislation that would bar companies from future oil and gas leases unless they agreed to rework the flawed 1998-99 leases. The Senate has yet to act on that measure.

Bingaman has expressed concern that the House legislation could lead to protracted litigation over its legality. He said he wanted to find another approach to dealing not only with the flawed leases but to clarify the Interior Department’s overall authority to require royalty payments.