Democrats Target Killing Royalty Breaks for Oil Companies

As the House prepared to impose new fees on oil and gas taken from federal waters, some Senate Democrats said Wednesday that royalty breaks for energy companies ought to be abandoned.

House Democrats are confident they can approve an energy package Thursday which includes a conservation fee on oil and gas from the Gulf of Mexico, seeks to recoup royalties lost because of a government error in drilling leases in the late 1990s, and rolls back several oil industry tax breaks.

Part of House Speaker Nancy Pelosi's priority agenda for the first 100 hours of Democratic control of Congress, the energy proposals targeting highly profitable oil and gas companies are expected to breeze through the House.

Rep. Nick Rahall, D-W.Va, chairman of the House Natural Resources Committee, said he expects bipartisan support and that the bill already has more than 200 co-sponsors.

The legislation also rescinds oil company benefits from a 2004 tax break that was largely aimed at promoting domestic manufacturing against imports. It has saved the oil industry $700 million a year in taxes, estimated Rep. Jim McDermott, D-Wash., who offered a similar bill a year ago, but got nowhere with it in the then-GOP controlled House.

"We'll hear a lot of squealing from oil companies," McDermott said.

The oil industry has argued that the royalty relief has prompted exploration and production in areas such as extremely deep waters of the Gulf that otherwise might not have been pursued because of cost. And they maintain the tax break targeted by the House also promotes domestic production.

In a speech Wednesday, Red Cavaney, president of the American Petroleum Institute, cautioned against passing "punitive energy taxes" that could dampen investment in oil and gas exploration and production.

But the industry arguments may get little sympathy in the House or among Senate Democrats, who said the government's royalty relief program — aimed at spurring high-stakes oil and gas development — should be scrapped.

Sen. Charles Schumer of New York, the Senate's No. 3 Democrat, produced a report arguing that royalty relief costs the Treasury tens of billions of dollars. He said it also produces little additional oil or gas, with the money better spent on developing alternative energy sources.

"Our report shows the subsidies don't give any bang for the buck ... I would be for repealing them all," said Schumer at a news conference.

Sen. Maria Cantwell, D-Wash., said the Senate is likely to go beyond the House bill when it comes to seeking changes in the Interior Department's oil and gas royalty program.

"The entire program is riddled with blatant mismanagement" that has allowed oil and gas companies to short change the federal government, Cantwell said.

The flawed 1998-1999 leases — which failed to include a threshold requiring royalty payments once market prices reach a certain level — have been a priority target of both Democrats and Republicans in Congress.

While the error occurred during the Clinton administration, Democrats charged that the Interior Department has been slow in recognizing the problem and fixing it. Attempts to renegotiate the leases have been minimally effective. Five companies have agreed to pay royalties on future production under the leases, while some 50 companies balked. They argued the leases amount to valid contracts.

Meanwhile, a nine-month investigation by Interior's inspector general concluded that senior officials of the Minerals Management Service — including its director — were made aware of the lease problem as early as 2004, but did nothing to address the issue, The New York Times reported Wednesday.

The minerals service said in a statement that Director Johnnie Burton does not dispute that she may have been told of the lease problem in 2004, but that she does not "remember the event or the circumstances."

Burton and other senior agency officials told a congressional hearing in September that they first became aware of the 1998-1999 lease mistake in 2006 and quickly began the process of trying to get companies to renegotiate the leases.

Critics of the department's leasing program maintain that had the issue been addressed in 2004, when oil and gas prices were much lower than today, it might have been easier to rework the flawed lease agreements.