Bingaman on Royalties Dispute

March 31, 2006
01:32 PM
Energy writers are following reports which question if the U.S. Government has been collecting the correct amount of royalty revenue from oil and natural gas produced on publicly-owned lands. An article in today’s New York Times highlights a draft GAO report on the controversy and summarizes a number of GAO’s preliminary findings.
Sen. Jeff Bingaman, top Democrat on the Energy Committee, took the lead in asking GAO to investigate these allegations.  In January, he and 21 other senators asked GAO to review and analyze the adequacy of the royalty accounting and collecting process for oil and gas produced from Federal and Tribal lands.  They also asked GAO to review and report as to why royalty collections are not increasing at a rate comparable to the rise in natural gas prices, and to evaluate the adequacy of the Interior Department’s audit capabilities.
GAO this week briefed Hill staff on its preliminary findings. Those early numbers were troubling enough to Sen. Bingaman that yesterday he asked the Interior Secretary what she planned to do to address this situation:
March 28, 2006
The Honorable Gale A. Norton
U.S. Department of the Interior
1849 C Street, NW
Washington, D.C.  20240
Dear Secretary Norton:
            I am extremely concerned about information that has recently come to light regarding the implementation of the Outer Continental Shelf Deepwater Royalty Relief Act of 1995.  According to draft information received yesterday from the Government Accountability Office, problems with implementation of this law could result in losses to the Treasury of billions of dollars in royalty collections. 
            I understand that leases for the production of oil and gas on the Outer Continental Shelf issued by the Minerals Management Service during 1998 and 1999 omitted provisions requiring that relief be terminated when prices exceed a threshold amount.  Thus, production of a specified  volume of oil and gas from these leases continues to be royalty free despite record high market prices for oil and gas.  GAO’s preliminary estimate is that this omission may cost the Treasury $10 billion.
            Furthermore, I am advised that Kerr-McGee Oil & Gas Corporation has recently filed a lawsuit challenging the authority of the Department to impose price thresholds on all leases issued in 1996, 1997 and 2000.  It is my belief that Congress intended for the price thresholds to apply to all leases under the Outer Continental Shelf Deepwater Royalty Relief Act. However, GAO’s preliminary indications are that if Kerr-McGee prevails in this litigation, the exposure to the Treasury could be up to $60 billion. 
            While I understand that these are preliminary numbers based on assumptions regarding future prices and production, the magnitude of these estimates gives rise to serious concerns.  I write to inquire as to what you plan to do to address this situation and these significant potential losses to the taxpayers of our Nation.
            Your attention to this request and prompt reply are appreciated.
                                                                                                            Jeff Bingaman
                                                                                                            Ranking Member