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Oil firms in line for 7b royalty break { February 14 2006 } Original Source Link: (May no longer be active)
http://www.iht.com/articles/2006/02/14/business/oil.phphttp://www.iht.com/articles/2006/02/14/business/oil.php
http://www.nytimes.com/2006/02/14/business/14oil.html
Oil firms in line for $7 billion royalty break
By Edmund L. Andrews The New York Times
TUESDAY, FEBRUARY 14, 2006
WASHINGTON The U.S. government is on the verge of one of the biggest giveaways of oil and gas in American history, an estimated $7 billion over five years.
Under projections buried in the Interior Department's new budget plan, the government would let companies pump about $65 billion of oil and natural gas from federal territory over the next five years without paying any royalties to the government.
Based on the Bush administration's figures, the government will give up more than $7 billion in payments between now and 2011. The companies are expected to get the largess, known as royalty relief, even though the administration assumes that oil prices will remain above $50 a barrel throughout that period.
Administration officials say the benefits are dictated by laws and regulations that date from 1996, when energy prices were relatively low and Congress wanted to encourage more exploration and drilling in the high-cost, high-risk deep waters of the Gulf of Mexico.
"We need to remember the primary reason that incentives are given," said Johnnie Burton, director of the Minerals Management Service. "It's not to make more money, necessarily. It's to make more oil, more gas, because production of fuel for our nation is essential to our economy and essential to our people."
But what seemed like modest incentives 10 years ago have ballooned to levels that have alarmed even ardent supporters of the oil and gas industry, partly because of additional provisions approved during the Clinton administration but also because of ambiguities in the law that energy companies have successfully exploited in court.
Short of imposing new taxes on the industry, there may be little Congress can do to reverse its earlier giveaways. The new projections come as President George W. Bush and Republican leaders are on the defensive about record energy prices, soaring profits at major oil companies and big cuts in domestic spending. Bush and House Republicans also are trying to kill a one-year, $5 billion "windfall profits" tax on oil companies that the Senate passed last autumn.
Moreover, the projected amounts could be just a start. Last week, Kerr-McGee Exploration & Development said it would mount a court challenge that, if successful, could cost the government $28 billion more in royalties over the next five years.
"It's one of the greatest train robberies in the history of the world," said Representative George Miller, Democrat of California, who has fought royalty concessions on oil and gas for more than a decade.
"The fact of the matter is that those investments would have been made in any case," Miller said.
"The best evidence for that is in Oil and Gas Journal. Companies are buying up other companies, and they're going into the most hostile environments in the world in order to put more reserves on their books."
Republican lawmakers are also concerned about how the royalty relief program is working out.
"I don't think there is a single member of Congress who thinks you should get royalty relief at $70 a barrel" for oil, said one, Representative Richard Pombo of California, chairman of the House Resources Committee.
"It was Congress's intent," Pombo said in an interview on Friday, "that if oil was at $10 a barrel, there should be royalty relief so companies could have some kind of incentive to invest capital. But at $70 a barrel, don't expect royalty relief."
Tina Kreisher, a spokeswoman for the Interior Department, said Monday that the royalty concessions might be smaller than the basic forecasts indicate because of "certain variables."
The government does not disclose how much individual companies benefit from the incentives, and most companies refuse to disclose either how much they pay in royalties or how much they are allowed to avoid.
But the benefits are almost entirely for gas and oil produced in the Gulf of Mexico. The biggest producers include BP, Chevron and Exxon Mobil as well as smaller independent companies like Anadarko and Devon Energy. Executives at some companies, including Exxon Mobil, said they had already stopped claiming royalty relief because they knew market prices had exceeded the government's price triggers.
As it happens, oil and gas royalties to the government have climbed much more slowly than market prices over the past five years.
The New York Times reported this month that one major reason for the lag appeared to be a widening gap between the average spot market prices for natural gas that companies report to the government and the average spot prices they report to their own shareholders.
Industry executives and administration officials contend that the disparity mainly reflects different rules for defining sales prices.
Administration officials also contend that the disparity is illusory, because the government's annual statistics are muddled up with big corrections from previous years.
Both House and Senate lawmakers are now investigating the issue, as is the Government Accountability Office, the watchdog agency of Congress.
But the much bigger issue for the years ahead is royalty relief for deepwater drilling.
The original law, known as the Deep Water Royalty Relief Act, had bipartisan support and was intended to promote exploration and production in deep waters of the outer continental shelf.
Oil and gas prices then were comparatively low, and few companies were interested in the high costs and risks of drilling in water thousands of feet deep.
The law authorized the Interior Department, which leases out large tracts for drilling in the Gulf of Mexico, to forgo its normal 12 percent royalty for much of the oil and gas produced in very deep waters. Because it take years to explore and then build offshore platforms, most of the oil and gas from the new leases is just beginning to flow.
The Minerals Management Service of the Interior Department, which oversees the leases and collects the royalties, estimates that the amount of royalty-free oil will quadruple by 2011, to 112 million barrels. The volume of royalty-free natural gas is expected to climb by almost half, to about 1.2 trillion cubic feet, or 34 billion cubic meters.
Based on the government's assumptions about future prices - that oil will hover at about $50 a barrel and natural gas will average about $7 per 1,000 cubic feet - the total value of the free oil and gas over the next five years would be about $65 billion, and the forgone royalties would total more than $7 billion.
Administration officials say the issue is out of their hands, adding that they opposed provisions in last year's energy bill that added new royalty relief for deep drilling in shallow waters.
"We did not think we needed any more legislation, because we already have incentives, but we obviously did not prevail," said Burton, director of the Minerals Management Service.
But the Bush administration did not put up a big fight. It strongly supported the overall energy bill and merely noted its opposition to additional royalty relief in its official statement on the bill.
By contrast, the White House promised to veto the Senate's $60 billion tax cut bill because it contained a one-year tax of $5 billion on profits of major oil companies.
"The president strongly believes that this tax would interfere with the free market and would lead to higher prices for consumers," a spokesman for the Treasury Department said last year. The House and Senate have yet to agree on a final tax bill.
The big issue going forward is whether companies should be exempted from paying royalties even when oil and gas prices are at historic highs.
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