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Obama’s offshore oil drilling plan spurs push for billions in royalties

Markey says oil companies that received leases between 1996 and 2000 in the Gulf are drilling on public land for free. Markey says oil companies that received leases between 1996 and 2000 in the Gulf are drilling on public land for free.
By Michael Kranish
Globe Staff / April 8, 2010

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WASHINGTON — President Obama’s pledge last week to open huge areas for offshore drilling does more than expand potential oil and gas production. It creates an opportunity to pressure oil companies to pay billions of dollars for past deep-water oil production if they want to drill in the new areas.

At issue is a hotly contested law that, as read by the court, has allowed companies to avoid paying royalties on oil drilled in the Gulf of Mexico. Critics, including Representative Edward J. Markey of Malden — who plans to introduce legislation next week — now seek to force companies such as ExxonMobil and Shell to begin paying on those existing leases as a condition of obtaining new ones.

The payments could add up to $50 billion for federal coffers.

“What most people don’t know is that under a poorly drafted law in the 1990s, oil companies [that] received leases between 1996 and 2000 in the Gulf of Mexico are now drilling on public land for free,’’ said Markey, chairman of the House subcommittee on Energy and Environment.

“As oil prices are high and rising, this is an outrage and something that is completely unjustifiable,’’ he said.

Deep-water drilling is both difficult and expensive. It takes place up to 220 miles offshore and at depths that can exceed 7,500 feet. In 1995, Congress sought to spearhead deep-water oil exploration by granting companies relief from some royalties. The government interpreted the law as allowing royalties to be collected once the price of oil reached a certain price.

But one of the oil companies challenged the price trigger, and won a long-fought court case last year that is forcing the government to refund $2 billion in royalties that had already been paid. Moreover, because of the ruling, the government won’t get up to $53 billion in future royalties — a major hit for taxpayers.

Oil companies contend they are playing by rules that Congress wrote to encourage exploration for oil; the Obama administration counters that lawmakers never intended to forgo royalties for drilling in federal waters once the price of oil spiked.

“We’ve not been happy about this,’’ David Hayes, the second-ranking official at the Department of the Interior, said in an interview. “We need congressional action to deal with it.’’

Markey has drafted legislation that would require any company seeking to bid on the new offshore sites to first renegotiate the disputed leases — and resume payments to federal coffers.

He believes that chances for passage are good. A similar bill was incorporated into legislation that passed the House in 2008, but it was not taken up by the Senate. Now, with Obama offering many more leases for bidding than were at stake in the 2008 bill, advocates hope that the political environment is riper for passage.

The Obama administration has not yet taken a position on the legislation. It is reviewing the proposal and other options before deciding how it wants to proceed.

The government typically extracts payments from companies that remove energy resources from federal holdings, from Rocky Mountain mines to federal waters.

Oil companies pay upfront bidding fees to obtain leases and pay taxes on profits if the leases reach production. But the biggest revenue stream to the government typically is the royalty based on the value of the oil and gas discovered.

The court decision that suspended payment of royalties on the 1996-2000 deep-water leases was a bonanza for oil companies. Of more than 1,000 leases at stake, at least 70 are in production, with more expected, the Interior Department said. The leases are expected to be even more lucrative as the economy improves and the price of oil goes up, while the cost of such drilling technology goes down.

After losing its appeal, the government began several weeks ago to refund $2 billion in royalties already paid, including $31 million to ExxonMobil and $102 million to Shell oil company. A spokesman for ExxonMobil declined to comment and officials at Shell did not respond to a request for comment.

Government officials say the loss of future royalties will have the biggest impact, estimated to be between $20 billion and $53 billion, depending on the price of oil. The leases last as long as the site is productive, which can be several decades.

“We are losing tons of money. Those leases turned out to be immensely profitable,’’ said Frank Rusco, director of the Natural Resources and Environment branch of the Government Accountability Office, the investigative arm of Congress.

The oil industry says it plans to fight efforts by Markey and others to revive royalty payments. Cathy Landry, spokeswoman for the American Petroleum Institute, which represents many of the nation’s oil companies, said it is unfair for members of Congress to try to change the rules after the court decision.

“They did it at the time when prices were really low and they were trying to encourage development,’’ she said. “Maybe this was an oversight on their part, but at the time, I don’t think too many people would have thought oil prices would have gotten to $130 per barrel or $50 a barrel. But you can’t say, ‘Well, we meant this all along.’ ’’

Oil industry representatives stress that, aside from questions about royalty payments, the program to kick-start deep-water drilling has been a resounding success, creating thousands of jobs, spurring new technologies, and producing large amounts of oil and natural gas.

Hayes, the deputy secretary of the Interior Department, said that the administration is also focusing on fixing other problems in the lease program. For example, federal investigators last year told Congress that the US government has one of the world’s lowest royalty rates for oil and gas leases, ranking 93d out of 104 governmental agencies in different countries. Moreover, unlike in some other countries, the US government does not automatically change its royalty rates according to market conditions, according to the testimony from an official of the GAO.

“We are looking at this really across the board: Is the American taxpayer getting fair value for use of these resources?’’ Hayes said.

Companies that bid on the leases to the newly opened areas are likely to have to pay at least the current royalty rate of about 18 percent.

The Obama administration, meanwhile, has suggested that one way to make up for the lost royalties is to impose a new tax on companies that successfully challenged payments.