US' Bodman weighs in on royalty dispute, backs producers

Washington (Platts)--15Feb2006

US Energy Secretary Samuel Bodman weighed in on the issue of alleged
underpayment of oil and gas royalties by companies producing on federal lands,
saying he believed it would be an error to now try to assess royalties on
leases companies had acquired thinking production from those lands would be
royalty free.

     "My understanding was that [the Clinton administration] passed a law that
would relieve the oil companies from paying royalties in order to stimulate
more oil and gas," Bodman said at a House Science Committee hearing." A deal
was made and a contract was drawn; if the deal were to be changed that would
be an error."

     Congress in 1995 passed the Deep Water Royalty Relief Act that authorized
the Interior Department secretary to grant relief for all leases in water
depths of 200 meters or more in Gulf of Mexico sales from 1996 to 2000. Actual
price thresholds specifying when royalty relief would be suspended was not
mentioned in the act, nor were they mentioned when Interior issued the final
regulations implementing the act in January 1998.

     The nominal price of West Texas Intermediate crude on the New York
Mercantile Exchange averaged $16.73/bbl in January 1998, according to Platts'
historical data on oil prices.

     Ten oil and gas companies have told the US government they do not believe
they should have to pay a total of $128-mil in royalty payments for oil and
gas produced in 2004 from federal leases in the deep waters of the Gulf of
Mexico and one--Kerr-McGee--may go to court to challenge MMS' order to pay.

     Kerr-McGee and two other companies, Forest Oil and British Borneo, have
refused to pay a total of $59-mil for royalties the government says they owe
on 2004 production, while seven other companies have paid all or part of their
royalty bills for that year, but are appealing a remaining $69-mil of
payments.

     All the leases in question were issued between 1996 and 2000 when the
government was giving royalty relief to producers to spur development of the
high-risk, capital-intensive area of the deepwater Gulf of Mexico.

     Kerr-McGee informed the Interior Department last week that it intends to
file a legal challenge, which it believes would serve as a test case for the
courts to determine whether the government has the legal right to use price
thresholds to suspend royalty relief on leases issued between 1996 and 2000.

		--Daniel Whitten, daniel_whitten@platts.com
		--Cathy Landry, cathy_landry@platts.com

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