Once upon a time, the price of oil was so low — dropping under $11 a barrel in late 1998 — that Congress agreed that big oil companies needed incentives to drill for oil in the federal waters of the Gulf of Mexico. So in 1995, it ordered the Interior Department to waive royalties on virtually all of the oil and natural gas that would come out of wells drilled between 1996 and 2000.
Rep. Edward J. Markey (D-Mass.), the ranking member of the Natural Resources Committee, has come up with an estimate of how much money the oil companies would have paid so far: $11 billion.
The committee’s Democrats have released a report that says roughly 25 percent of the oil currently produced in the Gulf of Mexico is not subject to royalty payments. It says more than 100 oil and gas companies fully or partially own more than 200 royalty-free leases for deep-water drilling in the Gulf of Mexico. And they could pump enough oil and gas from those wells over the next 10 years to generate $15.5 billion more in royalties — if they owed them.
The biggest beneficiaries, including their wholly-owned subsidiaries, so far: Chevron, which under ordinary royalty terms would have paid $1.5 billion, and Anadarko Petroleum, which would have paid more than $1 billion. Other leading winners are BP with $772 million, BHP Billiton with almost $680 million and Hess with more than $565 million. Altogether the industry has pumped almost 840 million barrels of oil and 3.4 trillion cubic feet of natural gas royalty-free, the report says.
State-owned or partially state-owned foreign firms — including Italy’s Eni, Norway’s Statoil, and Brazil’s Petrobras — also own shares of leases not subject to royalties, the report says.
The oil companies have rejected Markey’s estimate as an effort to reignite an old feud about the Outer Continental Shelf Deep Water Royalty Relief Act of 1995. They say the real bottom line is that without the royalty breaks, the wells would not have been drilled. Then there would be fewer oil and gas supplies — and still no revenue for the federal government.
“The Deep Water Royalty Relief Act was a good example of sound, constructive energy policy that was very successful in establishing a reliable source of domestically produced energy,” said John Christiansen, spokesman for Anadarko. “Without the DWRRA incentives that spurred these long-term investments, much of the domestic production in these frontier areas of the deep-water Gulf of Mexico would not exist today.”
Moreover, he said, the lease bonuses, royalties and income taxes on deep-water production paid to the federal government from other wells still total in the billions of dollars “and have grown markedly since 1995.”
Of course, oil prices also have grown markedly since 1995, up ninefold from the nadir of 1998.
As oil prices soared, lawmakers and the Interior Department tried to revoke the waiver, invoking a clause requiring that royalties be paid when oil passed a price of $28 a barrel (adjusted for inflation) or when production volume passed certain thresholds.
But one of the companies, Kerr McGee, later acquired by Anadarko, filed suit and won appeals court backing for its assertion that the Interior Department lacked authority under the 1995 act to impose price thresholds. After the Supreme Court decided not to hear the case, oil companies — which had been paying the royalties anyway pending an outcome to the case — received refunds. Markey says the provisional payments show that the companies did not need relief to begin with.
With record high oil prices, the 1995 deal looks worse and worse from the government’s point of view. And Markey is saying that undoing it could contribute a small portion of the revenue needed to avoid the looming automatic spending cuts known as sequestration. The current royalty rate on offshore oil is 18.75 percent.
“Oil companies were drilling just fine on these leases before they went to court to spurn the taxpayer and drill for free,” said Markey, who is again urging Congress to cancel the royalty breaks. “Now that oil is hovering near $100 a barrel and there are more than 3 billion barrels of oil equivalent left in these wells, there is no reasonable argument for oil companies to make to continue cheating U.S. taxpayers at the well and then ask for more money at the pump.”
But the companies are not about to endorse that idea.
“Chevron pays all royalties as required by law and our contracts,” Chevron spokesman Russell Johnson said in an e-mail. He noted that Chevron is one of the largest leaseholders in the Gulf of Mexico.