Language in the US energy bill now being considered by Congress would
require oil and natural gas companies to pay royalties on deepwater production
from federal leases issued from 1996-2000, even if courts uphold and expand a
recent ruling relieving Kerr-McGee from having to pay some royalties from some
of those leases, the nonpartisan Congressional Research Service said Friday.

CRS conducted the analysis at the request of Representative Edward
Markey, a Democrat from Massachusetts, who is urging the US Justice Department
to appeal the district court ruling because he fears it could lead to the US
Treasury losing as much as $60 billion in royalty revenues.

Judge Patricia Minaldi of the US District Court for the Western District
of Louisiana's Lake Charles Division this month ruled that the US Minerals
Management Service unlawfully imposed price thresholds on eight deepwater Gulf
of Mexico leases awarded to Kerr-McGee, now owned by Anadarko, in 1996-2000.
She said the imposition of thresholds contradicted the will of Congress, which
had enacted a law to promote deepwater drilling during that period by allowing
companies to produce without paying royalties on initial volumes.

Markey drafted language in the House-passed energy bill to recover an
estimated $10 billion in unpaid royalties from Gulf of Mexico leases granted
in 1998 and 1999 that failed to include customary price threshold clauses.
Such clauses impose royalty payments on companies if prices exceed a certain
level, typically above historic averages.

CRS, in a memo released Friday, noted that the language of the
House-passed bill does not specifically single out leases issued in 1998-1999
but defines "covered leases" as any lease that is not "subject to limitations
on royalty relief" based on oil or natural gas market prices.

"Thus, if the Western District of Louisiana is affirmed on appeal, then
it appears that none of the leases issued between 1996 and 2000 would be
'subject to limitations on royalty relief based on market price,' and thus all
of these leases would 'be covered leases' under the proposed act," CRS said.

"As a result, any entity that holds a deep water lease issued between
1996 and 2000 would be ineligible for future oil or natural gas production
leases in the Gulf of Mexico -- until that entity either renegotiates the
lease in question or pays a 'conservation of resources' fee" of $9/b for oil
and $1.25/MMBtu for gas for producing leases and $3.75/acre for non-producing
leases.

--Cathy Landry, cathy_landry@platts.com