Royalty Watching

The United Kingdom and the fifteen other nations of the Commonwealth Realm intently watch the doings of Prince Charles and the Duchess Camilla, the would-be-king Prince William, and the rascally Prince Harry. Japan has Emperor Akihito and Empress Michiko and their three royal children. And finally there is the wily Sovereign Prince of Monaco Albert II. While these royal families provide the paparazzi, tabloids, and millions of adoring subjects with scandal, mystery, and intrigue, we at the Chopping Block have our own infatuation with royalties: oil royalties (see The Oil Royalty Rip-Off and When We Were Kings - Royalty Relief for Big Oil).

This past March, Edmund Andrews of the New York Times uncovered a potential windfall for oil and gas companies that bought leases in the Gulf of Mexico between 1996 and 2000. The federal government could forfeit approximately $80 billion in royalty payments over the next 25 years, because of the Deepwater Royalty Relief Act. The Act, passed in 1995, was intended to spur oil and gas production in the deepwaters of the Gulf of Mexico by reducing, or eliminating the royalties paid on deepwater production. The royalty relief was not unlimited, Congress created limits on the royalty relief based on the volume of production or the market prices, otherwise known as price thresholds. The implementation of the Deepwater Royalty Relief Act is causing problems. The Department of the Interior, which is responsible for managing oil and gas leases, failed to include price thresholds in leases signed in 1998 and 1999 potentially costing $10 billion over the next 25 years. In addition, Kerr-McGee filed a potential $60 billion lawsuit challenging the implementation of the Act.

While some in Congress have traditionally behaved like serfs of Big Oil, there has been a mini-revolt in its pursuit of a solution. In May, the House of Representatives, led by Reps. Maurice Hinchey (D-N.Y.) and Edward Markey (D-Mass.), voted to attach an amendment to the Interior and Environment spending bill forcing oil companies to either renegotiate the leases signed in 1998 and 1999—and ensure taxpayers receive the $10 billion in oil royalty revenues they should be paid for these two years—or be barred from buying new oil and gas leases in the Gulf. Rep. Darrell Issa (R-Calif.) is also aggressively investigating the contracts signed in 1998 and 1999, and introduced legislation preventing oil companies, led by Kerr-McGee, from accessing federal courts to pursue a potential $60 billion lawsuit challenging the Interior Department’s authority to place limits on royalty relief.

Heading into last week’s congressional recess we saw some of the best royalty drama yet. First, Rep. Issa called Exxon Mobil, Kerr-McGee, ConocoPhillips , Shell and Chevron to testify before the Government Reform Committee Shell, Chevron, and ConocoPhillips voluntarily pledged to renegotiate the leases to ensure taxpayers receive royalties. Exxon Mobil remained non-committal, while Kerr-McGee continued to push their legal theory that the Deepwater Royalty Relief Act did not grant authority to the Department of the Interior to issue price thresholds with leases sold between 1995 and 2000.

On the Senate side, members of the Senate Appropriations Committee also won in a skirmish with Big Oil. Sens. Diane Feinstein (D-Calif.) and Judd Gregg (R-N.H.) offered an amendment to the Interior and Environment spending bill that mirrored the Hinchey language. The amendment succeeded 15 to 13, with support from Republican Senators DeWine (Ohio) and Bennett (Utah), while Democrat Mary Landrieu (La.) opposed.

The day after the Feinstein-Gregg amendment passed, Kerr-McGee announced plans to back away from their lawsuit and instead attempt to “mediate” their dispute over royalty relief with the government. This announcement marked an abrupt about-face from the company’s unapologetic testimony two weeks earlier before the Government Reform Committee. This sudden reversal of opinion is less about royal fiat, and more about the congressional pressure being applied to Big Oil to renegotiate.

The oil royalties debacle may not be as exciting as finding all of Prince Albert II’s illegitimate offspring, but it is a scandal nonetheless, and one that could cost taxpayers more than $80 billion if it’s not handled correctly. So far, Congress is on the right track, but let’s hope they don’t get blinded by a paparazzi flash bulb and thrown off course.