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Washington, D.C. - One week after the U.S. Department of the Interior reported that it had reached agreements with five energy companies to fix a clerical error that had allowed those companies to explore and drill for oil and gas on public property without paying royalties to the federal government, Congressman Maurice Hinchey (D-NY) today demanded answers from the agency's secretary about the apparent lax provisions in those newly reached agreements. In particular, Hinchey questioned why the agency created various way for the energy companies to back out of the agreements if the companies deem the deal to be unfair at a later point in time. The congressman also noted that despite the fact that five companies have reached this agreement, more than 40 other companies have yet to do so.
"Having looked at the negotiating terms [of the new agreement] more closely, I am writing to raise my serious concerns about the terms of this new agreement, which in my view, continue the Department’s pattern of giving sweetheart deals to the oil industry and a raw deal to American taxpayers," Hinchey wrote in a letter to Interior Secretary Dirk Kempthorne. "Taken together, these terms appear to give the same oil companies who are enjoying record profits any and every excuse to back out of the Department’s new agreements. The Department should serve as a watchdog and advocate for the public interest, working to ensure that the American people get a fair return from oil companies who extract valuable resources from waters owned by all of us. Unfortunately, the agreement reached by the Department does nothing to allay concerns, which the Department’s own Inspector General so aptly summed up when he testified that, 'short of a crime, anything goes at the highest levels of the Department of the Interior.'"
The Government Accountability Office (GAO) reports that the Interior Department itself estimates that the current royalty loophole provided to oil and gas companies will end up costing the federal government as much as $60 billion in lost payments. The Deepwater Royalty Relief Act of 1995, which Hinchey opposed, gave the Interior Department the ability to exempt the energy industry from paying royalties under the pretense that such a policy was needed 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 climbed to 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.
After reviewing the recent agreements between the five energy companies and the Interior Department, Hinchey noted in his letter to Kempthorne that the newly struck deal: does nothing to recoup royalty payments on past production; allows the companies to terminate the new agreement if other energy companies get a better deal from the federal government at a later point in time; terminates the agreement if the federal government loses a pending lawsuit with Kerr-McGee over royalty payments; and terminates the agreement if Congress passes legislation, including a measure offered by Hinchey, that is then enacted to close the royalty loophole.
In his letter to Kempthorne, Hinchey asked several pointed questions about the agency's efforts to recover royalty payments from energy companies on behalf of the American people. Among other things, Hinchey wants to know how much money the agency expects to recover from the five companies that reached the agreements; how much money the federal government will forego if it does not collect royalties on past production; how many other energy companies are negotiating a new deal with the agency; how many new lease sales have been held this year; and how many of the companies and which ones with royalty-free leases have received new leases in 2006.
"While the Interior Department has taken a few steps forward on royalty collection, they have been timid steps that don't assure taxpayers of any guaranteed collections from energy companies that are benefiting at record levels off the oil and gas being taken from public lands," Hinchey said.
In May 2006, Hinchey, who is a member of the House Interior Appropriations Subcommittee, Congressman Ed Markey (D-NY), and several of their colleagues successfully offered an amendment in the House to the Interior Appropriations bill for Fiscal Year 2007. The amendment, which passed the House but was not enacted because the Senate never took up the measure before adjourning, was 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-Markey measure did not require energy companies to rework their contracts, it did bar them from receiving future contracts unless they worked with the Interior Department to redo the existing contracts that contained the royalty-free error, thus providing energy companies with a large incentive to renegotiate the existing contracts. Although, the Hinchey-Markey measure did not become law in 2006, beginning January 4, 2007, Democrats will control both chambers of Congress. The Democratic leadership has made it clear that closing the royalty loophole for oil and gas companies will be a top priority.
A handful of the roughly 1,000 royalty-free leases are starting to produce oil and gas now. These leases are expected to produce oil and gas that would net the federal government more than $60 billion from oil and gas companies, but the American taxpayers don't receive royalty payments under current law. To make matters worse, Republicans extended the Deepwater Royalty Relief Act as part of the energy bill they passed in 2005.
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The full text of Hinchey's letter to Kempthorne follows:
December 21, 2006
Secretary Dirk Kempthorne
Department of the Interior
1849 C Street, NW
Washington DC 20240
Dear Secretary Kempthorne:
As you know, members of Congress from both parties have expressed serious concern about the fact that the Department of Interior had failed to include price thresholds in leases issued in 1998 and 1999 pursuant to the Deepwater Royalty Relief Act. More broadly, Congress has also expressed its disapproval over the Department’s lax oversight of the royalty program as a whole. Despite this, I was pleased that the Department responded to our concerns by entering into discussions earlier this year with some oil companies, with an eye toward renegotiating the flawed leases.
A Minerals Management Service press release last week indicated that the Department reached agreements with five companies to renegotiate the erroneous leases and include the market-based limits on royalty relief that Congress had always intended. Having looked at the negotiating terms more closely, I am writing to raise my serious concerns about the terms of this new agreement, which in my view, continue the Department’s pattern of giving sweetheart deals to the oil industry and a raw deal to American taxpayers.
In particular, it appears the new agreement would:
• Do nothing to recoup royalties on past production that has already occurred before October 2006, allowing these companies—which have a combined six leases in production—to escape giving a return to taxpayers for oil and natural gas they’ve already drilled.
• Allow the five companies to terminate the agreement if, in an attempt to recoup royalties from the more than 40 companies who have not yet renegotiated leases, the Department in a future lease agrees to terms “more favorable” with another company.
• Terminate the agreement in the event the Department loses the lawsuit filed by Kerr-McGee challenging its authority to impose limits on royalty relief, or any other lawsuit alleging that the Department lacks this authority. Under normal legal circumstances, these five companies would need to take their own case to court in an attempt to benefit from a legal ruling in another company’s case.
• Terminate the agreement if Congress enacts legislation intended to address the faulty 1998 and 1999 leases, including any attempts to recoup royalties on past production that has already occurred under these leases—production that has cost taxpayers approximately $2 billion in lost royalties. Indeed, this provision appears designed to thwart Congressional attempts to correct a multi-billion dollar problem that the Department has failed to adequately address. Furthermore, it's clear that the agreement would require the Department to refund royalty payments to companies that had previously agreed to pay under the agreement.
Taken together, these terms appear to give the same oil companies who are enjoying record profits any and every excuse to back out of the Department’s new agreements. The Department should serve as a watchdog and advocate for the public interest, working to ensure that the American people get a fair return from oil companies who extract valuable resources from waters owned by all of us. Unfortunately, the agreement reached by the Department does nothing to allay concerns, which the Department’s own Inspector General so aptly summed up when he testified that, “short of a crime, anything goes at the highest levels of the Department of the Interior.”
After 12 years of very little oversight, the 110th Congress will conduct much more oversight when we examine the administration's budget and the Department's policies toward stewardship of our natural resources. Failure to respond to concerns and questions will not be taken lightly, and as a member of the Interior Appropriations Subcommittee with jurisdiction over the Department if Interior's budget, I will do everything in my power to ensure that the American taxpayers get a fair return for the use and exploitation of their public resources.
Finally, there are a number of questions that have arisen as a result of reading the negotiating terms and I would appreciate the Departments providing direct and complete answers to them:
1) How much money does the federal government expect to recoup from these five lease holders?
2) How much money will the federal government forego if it does not collect unpaid royalties prior to October 2006?
3) How many of the approximately 40 royalty-free lease holders are still in the process of negotiating with Interior?
4) How many OCS lease sales have been held in 2006?
5) How many of these same royalty-free lease holders have already bid on lease sales since this issue has been exposed in early 2006?
6) How many and which lease holders have been awarded with additional leases in 2006?
I would appreciate your earliest response, and I look forward to working with you in the next Congress. Please accept my best wishes.
Sincerely,
Maurice Hinchey
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