U.S. attacks $19 billion oil, gas “windfall”
on Jul 18, 2009 at 6:13 pm
Saying that the federal Treasury is at risk of giving up nearly $19 billion — and maybe more — in revenues, the Obama Administration has asked the Supreme Court to clarify the government’s power to collect royalties from oil and gas companies drilling in the Gulf of Mexico. In a petition filed Monday (U.S. Department of Interior v. Kerr-McGee Oil & Gas, docket 09-54), the government says companies drilling on nearly 100 leases stand to get “huge and unjustified windfalls” under a federal appeals court decision issued in January.
The Interior Department estimates the potenial royalty amount involved at somewhere between $17.97 billion and $18.98 billion, but says the figure may go even higher. “Whatever the precise amounts of forgone royalties ultimately proves to be, the total cost will be huge, and it will have a direct, adverse impact on the Treasury of the United States,” U.S. Solicitor General Elena Kagan said in the petition. (The petition, with appendix, can be downloaded here.)
In the eight specific leases at issue in the case, granted to Kerr-McGee Oil and Gas Corp. between 1996 and 2000, the Solicitor General said, the company signed leases making its temporary exemption from royalty payments depend upon whether oil and gas prices rose on commodity markets, and that those prices, in fact, have gone above specified threshold levels.
But the Fifth Circuit Court ruled that, under the specific section of a 1995 law governing leases issued in the five years after that law was passed, the government does not have the power to demand royalties if the company holding the leases has not reached minimum production levels.  The Interior petition says the Circuit Court simply read out of the law a provision giving the Secretary authority to mandate royalty payments keyed to price increases.
 The oil drilling involved in the case is going on now in deep waters — 200 feet or more — off the coasts of Texas, Louisiana and Mississippi. The exploration is under new leases issued by the Interior Department under the Outer Continental Shelf Lands Act — a law originally dating to 1953, governing mineral development more than three miles seaward of state coastal boundaries.
The 1995 amendments to the Act, designed to encourage oil and gas exploration, allow the Secretary to suspend royalty payments if minimum production levels have not been achieved. There is no debate, in the Kerr-McGee and other cases now proceeding, that the production levels have not been achieved. The issue turns on whether Interior may end the royalty suspension, requiring payments to the Treasury, if prices rise in the commodity market beyond specified minimums — $28 a barrel for oil and $3.50 per million BTUs of natural gas.
Kerr-McGee bid for and obtained eight leases in those fields of the Gulf, and it went to court after Interior demanded in 2006 that it pay some $36.2 million in royalties. Both a federal District Court and the Fifth Circuit ruled that, under the specific section of the law at issue — Section 304 — royalties cannot be demanded unless minimum production levels have been reached.
Kerr-McGee, according to the new petition, has also interests in 10 other leases that involve potential royalties of another $159 million, and those can be affected by the outcome of the case. Other than Kerr-McGee, other drilling companies have interests in more than 80 other leases.
Some companies have paid royalties of $1.5 billion, but could be entitled to refunds, if Interior loses the Supreme Court case.
There is no split in the Circuit Courts on the legal issue involved, the petition notes. But it adds that the issue is not likely to arise in any other Circuit and, besides, the amount of money at stake is so large that this factor alone suggests the need for Supreme Court review, Kagan argued.
Kerr-McGee will have a chance to respond to the new petition before the Supreme Court acts. The response is now due on Aug. 12, but the company could seek a delay. The Justices are expected to consider the case early in the Term that opens Oct. 5.
