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Washington, D.C. - Congressman Maurice Hinchey (D-NY), Congressman Ed Markey (D-MA), and seven of their House colleagues today called on Interior Secretary Dick Kempthorne to support their legislative efforts to correct a government clerical error that could cost the federal government as much as $20 billion in lost royalty payments from oil and gas companies that operate on public lands. The appeal to Kempthorne in the form of a letter comes just two days after The New York Times reported that a new oil field off the U.S. coast in the Gulf of Mexico was discovered by oil and gas companies operating under leases with the federal government that are missing clauses that call for royalty payments to be made to the government in exchange for the right to drill on those lands. The call for support from the Interior Secretary also comes on the heels of sharp testimony to Congress from the agency's Inspector General in which he said that the department was operating at the highest levels with a lack of ethics and cronyism.
"This problem of royalty-free leases started with a clerical error made by Interior Department officials in the 1990's, but it has been greatly exacerbated by the unwillingness of the Bush administration to put pressure on oil and gas companies to come back to the negotiating table and do the right thing, which is to operate in good faith with the federal government," Hinchey said. "The Interior Department's Inspector General has made it very clear that officials at that agency are operating in an unethical manner. The fact that the Bush administration is not fighting tooth and nail like we are in Congress to get these leases corrected so the American people can receive the tens of billions of dollars they are owed by oil and gas companies is just one more example of the misguided priorities of the Interior Department."
The Government Accountability Office (GAO) estimates that current royalty relief provided to oil and gas companies will end up costing the federal government as much as $20 billion over 25 years in lost revenue. The newly discovered oil field in the Gulf of Mexico is estimated to yield oil that would have provided the federal government with as much $1.5 billion in royalty payments had the clerical error not been made. According to the GAO, that figure could grow to more than $80 billion if oil companies win a pending lawsuit that would expand the scope of royalty relief.
Markey said, "The Interior Department's I.G. points to an 'anything goes' attitude at the Department's oil and gas leasing operations, which perhaps explains their opposition to a bipartisan effort to renegotiate oil leases that exempt industry from paying royalties. Allowing royalty-free drilling for huge, highly profitable oil and gas companies is like giving out ice in the winter – it is totally ridiculous. The public trust has been violated by an Interior Department that is chock full of individuals who were plucked from the private sector for the explicit purpose of loosening up federal oversight of our public lands."
The Deepwater Royalty Relief Act of 1995 gave the Interior Department discretion to provide royalty forgiveness to the energy industry in order to spur deepwater exploration when prices of oil and gas were low. That measure allowed the Interior Department to decide whether or not to put price thresholds into the leases that would trigger royalty payments to the federal government once oil and gas prices reached a certain level. However, due to a clerical error, the Interior Department left out price thresholds on contracts signed in 1998 and 1999, allowing oil and gas companies to extract resources from public property without paying royalties, regardless of the price of oil or gas. Many of those roughly 1,000 royalty-free leases are starting to produce oil and gas now, at a time when Americans are paying record prices. These leases are expected to produce more than $60 billion worth of energy for the oil and gas companies, but the American taxpayers will receive no royalties under current law. To make matters worse, Republicans extended the Deepwater Royalty Relief Act as part of the energy reform bill passed last summer.
To help close the loophole, Hinchey, Markey, and their seven House colleagues offered an amendment to the Interior Appropriations bill for Fiscal Year 2007 when that measure was debated in the House in May. Hinchey's amendment is aimed at getting energy companies with royalty-free contracts originating in 1998 and 1999 to rework their contracts so that they contain provisions for royalty payments to the federal government. While the Hinchey amendment doesn't require energy companies to rework their contracts, it does bar them from receiving future contracts unless they work with the Interior Department to redo the existing contracts that contained the royalty-free clerical error, thus providing energy companies with a large incentive to rework the existing contracts.
"We took this action [offering the amendment to fix the royalty loophole] because the American people own the offshore public lands and we should properly collect royalty payments from companies that profit from the development of these public lands. We offered our amendment to create a solution to a problem that was begging for one," Hinchey, Markey, and their colleagues wrote to Kempthorne today. "The recent discovery of the Jack Field only underscores the need for our amendment to prevail this year. It is our hope that you will agree with the House and Senate decisions and will support a real solution that will provide a strong incentive for all oil companies holding these leases to renegotiate. Doing so will help put an end to billions of dollars of royalty free oil and gas production at times when prices are high and people are paying a greater share of their incomes on basic necessities like fueling their cars and heating and cooling their homes."
Hinchey added, "Secretary Kempthorne inherited these problems when he recently took over at the Interior Department so he cannot be directly blamed now. However, he will be part of the problem unless he reverses the current course of the administration and starts fighting for the American people. This is an opportunity for a fresh start at the Interior Department."
Joining Hinchey and Markey in sending the letter to Kempthorne were the other cosponsors of the amendment to close the royalty-free loophole: Congressman Nick Rahall (D-WV), Congresswoman Carolyn Maloney (D-NY), Congressman George Miller (D-CA), Congressman Raul Grijalva (D-AZ), Congressman Bernie Sanders (I-VT), Congressman Jim Moran (D-VA), and Congresswoman Rosa DeLauro (D-CT).
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The full text of the letter from Hinchey, Markey, and their colleagues follows:
September 14, 2006
The Honorable Dick Kempthorne
Secretary
US Department of Interior
Washington, DC
Dear Secretary Kempthorne:
Recent reports have indicated that a group of oil companies led by Chevron have discovered reserves estimated to be holding between 3 and 15 billion barrels of oil in the deepwaters of the Gulf of Mexico, in the so-called Jack Field. We are writing because of our concern that some of the deepwater leases issued in the late 1990’s that cover this newly discovered field omit price thresholds based on market-price, rendering them royalty-free.
On Tuesday, The New York Times reported that the companies holding leases in this new oil field could avoid more than $1 billion in royalty payments to the federal government for the production of oil as the result of the lack of price thresholds. As reported in The New York Times, Chevron and its partners, Devon Energy and Statoil ASA of Norway, have six leases in the Jack oil field, approximately 175 miles off the coast of Louisiana. According to the article, two of these leases would allow the companies to avoid royalties on as much as 87.5 million barrels of oil per lease. While the exact total of the lost revenue would depend on the volume of oil actually produced and the price of oil at the time of production, The New York Times estimated that it could amount to as much as $1.5 billion in unpaid royalties if oil is $70 a barrel. What's more, even without this new field, the General Accountability Office has already indicated that the federal government and the American taxpayers stand to lose as much as $20 billion over the next 25 years due to the other existing 1998/1999 leases that were issued with no price thresholds, an omission the Department of Interior states was due to a clerical error.
While news reports have also indicated that the Department of Interior is currently seeking to persuade oil companies to voluntarily renegotiate these leases, we have already successfully offered a solution that would provide companies, including those with leases in the Jack Field, with a strong incentive to renegotiate. As you know, this past May when the Interior Appropriations bill was on the floor of the House, we led an effort to amend the bill to bar companies holding royalty-free leases from purchasing future leases from the federal government.
Our amendment overwhelmingly passed the House 252-165, and the Senate followed suit, adding similar language on its version of the bill. The American people own these resources and should get a fair return when we allow private, for profit, single-use development on these publicly-owned submerged lands. We are certain that our amendment creates a strong incentive for these companies to renegotiate the leases in question with the Interior Department at a time when oil companies are making record profits.
We took this action because the American people own the offshore public lands and we should properly collect royalty payments from companies that profit from the development of these public lands. We offered our amendment to create a solution to a problem that was begging for one. The recent discovery of the Jack Field only underscores the need for our amendment to prevail this year.
It is our hope that you will agree with the House and Senate decisions and will support a real solution that will provide a strong incentive for all oil companies holding these leases to renegotiate. Doing so will help put an end to billions of dollars of royalty free oil and gas production at times when prices are high and people are paying a greater share of their incomes on basic necessities like fueling their cars and heating and cooling their homes.
Inspector General Devaney's testimony on Capitol Hill on Wednesday painted a very bleak picture of how the Interior Department operates. Stopping short of labeling activities at the department as criminal, Devaney made it clear that Interior Department officials have consistently engaged in unethical and inappropriate behavior that has favored the interests of outside oil and gas companies over those of the American people. We realize that you have inherited these problems and we truly hope you take the steps to remedy them quickly. This is an opportunity for the Interior Department to start fighting for the American people rather than acquiescing to the oil and gas industry. We hope that you will begin this effort by supporting our attempt to correct these leases in error in the Fiscal Year 2007 Interior Appropriations bill.
We thank you for your time and we look forward to hearing your response on this critical issue at your earliest convenience.
Sincerely,
Maurice Hinchey, Ed Markey (and their seven House colleagues)
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