The Oil Royalty Rip-Off

Even as they wallow in record oil prices, the oil companies' top executives are trying to swindle the federal taxpayer for billions more in handouts.  The companies' latest gambit is to squirm out of paying royalties for the privilege of drilling for oil and gas in publicly owned offshore waters.  According to the Government Accountability Office (GAO), the companies' latest efforts could add as much as $80 billion over the next 25 years to the oil barons' enormous profits.

The seeds of the current royalty rip-off were planted in 1995 when Congress passed the Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA).  Proponents of the bill championed the legislation as an encouragement for oil companies to drill in the deep waters of the Gulf of Mexico at a time of record low oil and natural gas prices.  The bill provided a royalty "holiday" on lease contracts signed between 1996 and 2000 for oil and gas extracted from the Gulf of Mexico.  To make sure taxpayers weren't forced to take it on the chin forever, the 1995 law capped the royalty "holiday" based on volumes of oil and gas extracted and depths at which the fuels were drilled.  It limited royalty relief to a set volume of production from a lease: 17.5 million barrels from depths of 200-400 meters, 52.5 million barrels from depths of 400-800 meters, and 87.5 million barrels from depths greater than 800 meters.  In addition, the law tied the royalty holiday to market prices: when a certain price threshold is reached (approximately $34 a barrel currently), the royalty holiday ends - at least in theory.  These stipulations were suppose to apply to all leases signed between 1996 and 2000. 

Inexplicably, lease contracts signed in 1998 and 1999 failed to include stipulated price thresholds.  Naturally, the oil barons are primed to prey on this bureaucratic blunder and bilk the public out of billions in payments that are rightfully due to the Treasury.  The GAO estimates that taxpayers could lose out on $20 billion over the next five years, as a result of the 1998 and 1999 lease loophole and a  2003 legal victory by oil companies who'd challenged the methodology by which royalty relief was calculated.

Not content with this $20 billion, Kerr-McGee last week filed a lawsuit challenging the price thresholds for lease contracts filed in 1996, 1997, and 2000.  If this legal raid is successful, GAO estimates that the oil and gas industry could cheat taxpayers out of an addition $60 billion in royalties over the next 25 years for a grand total of $80 billion.

Fortunately for the taxpaying public, it appears the oil barons may have gone one step to far this time.  Several congressional committees including the House Resources and Government Reform Committees and the Senate Energy and Natural Resources Committee have launched investigations.  While these committees investigate whether the public's resources will be plundered by oil barons, bills have been introduced in the House of Representatives and the Senate to eliminate royalty relief when prices are high.

Stopping the royalty rip-off shouldn't really be difficult, except for those members of Congress whose campaign war chests are filled by the oil barons.  Congress should end this rip-off and force oil companies to pay their fair share.