Some Oil Companies Ready to Discuss Error in Oil Royalties

Several major oil companies said Wednesday they are willing to discuss with the Interior Department changes in offshore drilling leases containing a government error that could give the industry a $10 billion windfall.

But other companies, including Exxon Mobil Corp., said that while they are ready to work with the government on the issue, they oppose changes in the leases, issued in the late 1990s.

"We expect the terms of the existing leases to be honored," Tim Cejka, president of Exxon Exploration Co., told a House hearing. To renegotiate the questionable lease contracts "would set a bad example," he said.

But John Hofmeister, president of Shell Oil Co., said his company is ready to "enter into a dialogue" with the government and "willing to make changes" to correct an error made by the Interior Department that led to leases issued in 1998-99 that would allow companies to avoid royalty payments, even if oil and gas prices soar.

"It's time to resolve this issue," said Hofmeister. Officials of Chevron Corp., and ConocoPhillips Co., also said they are prepared to discussed changes in the leases, although they expressed concern about maintaining the "sanctity" of the contracts.

The error in the 1998-99 lease contracts for deep-water drilling in the Gulf of Mexico, could cost the government $10 billion in lost royalty payments given the current price of crude oil and natural gas, according to an analysis by the Government Accountability Office, Congress' auditing agency.

The drilling lease contracts, issued at a time when oil and gas prices were low, allowed lease holders to avoid royalty payments as a way to spur drilling in the deep waters of the Gulf. But they also were supposed to have language that the royalty relief would end if oil prices exceeded a certain level.

Since then, prices have soared to more than double the royalty trigger.

"We do not believe royalty relief in the current price environment is justifiable ... and we are not pursuing such relief," Hofmeister said as he and four other oil and gas executives testified before the Government Reform energy and resources subcommittee.

But Kerr-McGee Corp., a major gas producer that has challenged the legality of a price threshold in any of the leases issued in the late 1990s, stood firm on its unwillingness to discuss the issue with the government.

"The absence of price triggers from leases issued in 1998 and 1999 was not a mistake," said Gregory Pilcher, senior vice president and general counsel of Kerr-McGee. In fact, he argued, Congress viewed royalty relief as necessary in those leases.

Kerr-McGee has challenged the price thresholds in a lawsuit against the Interior Department.

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

Three senior attorneys who worked at the Interior Department and were involved in reviewing the questionable leases, told the subcommittee they did not learn until after the leases were issued that they did not contain an addendum requiring the price trigger.

Milo Mason, a former Interior Department attorney charged with reviewing the leases, said he first noticed the absence of the addendum sometime in 1999. "I was surprised," he said.

Mason said he recalls discussing the matter with his superior.

But at the time oil prices were well below the trigger level — $28 a barrel for oil and $3.50 a thousand cubic feet for natural gas — with little expectations that they would soar. Oil prices have been in the $70 a barrel range this year.

"It didn't seem like a big deal, as it is now. We figured the (low) price would continue," said Mason.

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 traditionally been the royalty trigger.

Congress has threatened action to force oil companies to renegotiate the 1998-99 contracts.

The House Resources Committee was to take up a measure later Wednesday that 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.

Last month, the House passed a measure that would bar oil and gas companies from bidding on 2007 lease contracts if they do not agree to renegotiate the questionable contracts.