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Discounts Benefit Oil Producers

Lower Fees Remain Despite High Cost of Fuel

By Justin Blum
Washington Post Staff Writer
Saturday, November 27, 2004; Page E01

During a year of high oil prices that have boosted energy company profits, the U.S. government continued to dole out millions of dollars in discounts to oil producers under a program created when prices were low to encourage pumping on federal land.

According to a Washington Post analysis, the government slashed more than $70 million from the royalty fees paid by oil producers in the fiscal year ended in September -- angering officials in some states, which split the payments with the federal government.

The discounts, created in the 1990s, benefit operators of low-producing wells and wells that pump less-profitable heavy oil. (Black Bear Oil Corp.)

The Interior Department created the discounts in the 1990s -- when prices were less than half of what they are now -- to encourage operators to keep pumping from low-producing wells and from wells that generate less-profitable heavy oil. But many producers said that, with elevated oil prices, they would continue operating even without the reductions.

Under the program rules, federal officials could have ended the discounts if they were ineffective or if oil prices were above a certain threshold for six months in a row. The Interior Department, however, never studied the effectiveness of the heavy-oil discounts and allowed those reductions to continue, even though prices have remained above the designated level longer than required.

California's controller, Steve Westly, in February filed a lawsuit in U.S. District Court in Washington seeking to remove the discounts, saying the Interior Department failed to show that discounts for either heavy oil or low-producing wells were beneficial. Westly estimated his state loses $8 million a year annually from the reductions, money that could be set aside for education.

"Should we be taking royalties away from public education and school children and giving them back to oil companies?" Westly asked. "I don't think that's good public policy. This is a windfall for oil companies at the expense of schoolchildren."

Companies brought in $1 billion from selling oil that was eligible for fee reductions during the last fiscal year, according to The Post's analysis of data from the Interior Department. In exchange for producing oil on federal land, the companies paid the government $56 million in royalties -- far less than the $129 million they would have owed had the reductions not been in place, the analysis showed.

More than 600 oil producers benefited from the fee reductions during the past year, including major companies, such as Exxon Mobil Corp. and BP PLC, and smaller operations most people have never heard of, such as Big Al Oil & Gas in Texas and Black Bear Oil Corp. in Nevada.

Interior Department officials stand by their program, saying that over the years, the discounts have made the United States less dependent on foreign oil by keeping in business producers that otherwise would have abandoned their wells. Interior Department officials said The Post's calculation showing more than $70 million in discounts is flawed because it does not consider that the amount of oil produced may have been smaller without the reductions. However, officials will not say whether they think producers would have pumped less oil during the past year if the discounts had not been in place.

A plan to rescind the discount for heavy-oil production is working its way through the Interior Department, said Celia Boddington, a spokeswoman for the department's Bureau of Land Management. The department has not moved to eliminate benefits for wells that produce less than 15 barrels of oil a day, which account for two-thirds of the discounts given out in the past year.

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