Congress Seeks to Close Oil Royalty Loophole

An attempt to keep oil companies from reaping as much as $10 billion because of an error involving royalty payments is gaining momentum in Congress.

The issue is to be the focus of two House panels on Wednesday.

Executives of five oil and gas companies — including Shell Oil Co., which was subpoenaed to appear — are scheduled to be questioned by the House Reform energy and resources subcommittee on their involvement in the questionable contracts.

Later, the House Resources Committee takes up legislation that would impose significant financial penalties on any company that refuses to reopen faulty offshore leases that were negotiated in 1998 and 1999.

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Last month the House included in a broader refinery bill a provision that would bar a company from getting new offshore oil leases from the Interior Department unless the contentious 1990s leases are reworked.

The issue stems from an error — or perhaps something more nefarious, though nothing more has been proven — in which the Interior Department failed to include in 1998-99 leases the required language that would have forced the oil companies to pay the government royalties on the oil and gas taken if prices reached a certain level.

The contracts, which involved deep-water drilling leases in the Gulf of Mexico, exempted the company from having to pay royalties as a way to stimulate exploration of the deep water areas of the Gulf of Mexico. That was OK as long as oil and gas prices stayed low as they did in the 1990s.

But since the leases are good for many years, the failure to include a price trigger allows the companies to avoid royalty payments even with crude prices now more than double what had been the royalty trigger.

The error could cost the government more than $10 billion in lost royalty payments over the life of the leases, according to an estimate by the Government Accountability Office, the auditing arm of congress.

In addition to Shell, executives from Exxon Mobil Corp., Chevron Corp., ConocoPhillips, and Kerr-McGee Corp., are expected to be asked why they should be given the royalty holiday when oil prices are so high and industry profits have soared.

Rep. Darrell Issa, R-Calif., said a five-month investigation by his subcommittee, has found "a trail of irresponsibility and gross mismanagement" in connection with the 1990s lease sales by the Interior Department.

But he said it's also "crucial to examine the role of the oil and natural gas producing companies," including "whether they ever raised issue with the omission of the price thresholds" in the 1998-99 lease contracts.

The oil industry has defended the contracts — involving 56 companies in all — and strongly objects to having them renegotiated.

"To force companies to renegotiate under the threat of ... punishment that is to be imposed through legislation ... is an attack on the sanctity of contracts," Red Cavaney, president of the American Petroleum Institute, wrote lawmakers recently.

The target of Cavaney's ire was the provision the House passed last month that would bar companies from 2007 offshore leases unless they agree to renegotiate the 1998-99 contracts.

The House Resources Committee is expected to go after the oil companies on the royalty issue as well on Wednesday.

Legislation offered by Resources Chairman Richard Pombo, R-Calif., would impose a $9-a-barrel "conservation of resources" fee on companies drilling offshore if they do not renegotiate the 1990s contracts. The fee also would apply to natural gas at the rate of $1.25 per thousand cubic feet.

Rep. Edward Markey, D-Mass., has been among the most vocal critics of the oil royalty exemption and co-sponsored the measure that passed the House last month, but he criticized Pombo's proposal.

The reason: Pombo attached the measure to legislation that would open the way for oil and gas drilling in offshore areas now off-limits to energy companies.

"The House voted overwhelmingly last month to fix this (royalty) problem without strings attached," said Markey.

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