Interior bid for hearing on $19B royalties case fails

The Supreme Court won't review an appellate decision blocking the Interior Department from ending royalty waivers at times of high oil and gas prices for deepwater energy producers in the Gulf of Mexico.

The court's rejection of a federal petition to review Department of Interior, et al., v. Kerr-McGee Oil and Gas Corp. means the government could lose tens of billions of dollars in future royalty revenue. It likely prevents Interior from imposing price-based limits on the royalty incentives -- called "royalty relief" -- for deepwater producers holding federal leases granted between 1996 and 2000.

At issue in the Kerr-McGee case is a 1995 statute that allows royalty-free production of large volumes of oil and gas, an incentive for industry to undertake costly deepwater projects. The law was drafted at a time of low oil prices to encourage expensive deepwater projects.

The case rests on whether Interior can impose ceilings, or price thresholds, that end the royalty waivers when oil and natural gas prices exceed certain limits.

Kerr-McGee Oil and Gas Corp., which was acquired by Anadarko Petroleum Corp. in 2006, had challenged Interior's effort to collect royalties on production from eight deepwater leases when oil and gas prices had exceeded the thresholds.


Anadarko argues that it did not owe more than $350 million in royalties due on the eight leases from production in 2003-2007, according to a Justice Department filing in the appellate case. The 5th U.S. Circuit Court of Appeals' decision in January upheld a lower court ruling in the company's favor.

But the appellate decision also affects other producers. The rejected certiorari petition noted 21 other pending administrative appeals for royalty payment orders that were awaiting the outcome of the case.

Also, some other leaseholders had continued paying royalties during the litigation, with the petition noting that roughly $1.5 billion in payments from leases issued in 1996, 1997 and 2000 are "called into doubt" because of the decision.

Future payments that will be forgone could total $19 billion, the petition stated. Other estimates have placed the cost of lost future royalty payments even higher, although any estimates are imprecise because the amount of royalties is tied to future oil and gas prices.

A Government Accountability Office analysis last year concluded that if the Kerr-McGee ruling is upheld, forgone royalties from leases issued in 1996, 1997 and 2000 could top $38 billion over 25 years.

"Whatever the precise amount of forgone future royalties ultimately proves to be, the total cost will be huge, and it will have a direct, adverse affect on the Treasury of the United States," the petition stated.

Leases issued in 1998 and 1999 did not include the price thresholds, an omission that has already jeopardized billions of dollars in future royalty payments.

Interior did not provide comment on the court's rejection of the decision by press time.

Legislation is possible

The case could spur renewed Capitol Hill efforts to ensure royalty collections or other payments from the disputed leases.

Democrats have floated several plans in recent years that targeted the 1998 and 1999 leases. But the plans would also capture the other 1996, 1997 and 2000 leases that allowed royalty waivers regardless of prices because of the appellate decision that the Supreme Court declined to review.

Proposals by Rep. Ed Markey (D-Mass.) would bar companies holding leases that are allowed royalty waivers regardless of energy prices from buying new gulf leases -- unless they renegotiate the old contracts or pay other fees. Other plans include new taxes on gulf producers that would be offset by royalty payments, thereby targeting the royalty-free production.

But those plans are opposed by the oil industry, which today applauded the Supreme Court's decision not to review the issue. American Petroleum Institute President Jack Gerard said in a statement that the 1995 royalty law has worked as intended.

"That act was passed at a time of historically low crude oil prices as a means to increase production and sustain jobs in a struggling industry. It was enormously successful, helping to boost deepwater Gulf of Mexico production by 50 percent in less than a decade," Gerard said.

The appellate case rested on the interplay between two provisions of the Deepwater Royalty Relief Act of 1995. One section broadly authorizes Interior to waive royalties for offshore leases but also allows the department to limit waivers based on energy prices.

Another section governs lease sales during the 1996-2000 period specifically and set levels of royalty-free production available, called suspension volumes. Anadarko had argued that the Interior's ability to impose price thresholds did not apply to the leases sold during those years.

The 1995 law allows royalty waivers on production volumes ranging from 17.5 million barrels of oil equivalent to 87.5 million barrels, depending on the depth.

"The Supreme Court's decision not to hear the case definitively reaffirms the Fifth Circuit's unanimous decision that Congress, when it passed the Deepwater Royalty Relief Act, provided royalty relief, based only on a volume limitation, not on price," Gerard said.

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