Video: Does Big Oil owe back royalties?

By John W. Schoen Senior producer
updated 1/18/2007 6:37:46 PM ET 2007-01-18T23:37:46

With the price of crude falling, Big Oil faces another big headache on Capitol Hill.

The House passed a bill Thursday evening to raise nearly $15 billion in taxes through a combination of higher royalties, added fees and a reversal of tax breaks handed out by the Bush administration and Republican Congress.

Earlier in the day, the Senate held hearings on the simmering dispute over federal oil leases that could cost the industry billions of dollars in back royalty payments.

At the center of the dispute is a series of leases awarded by the Interior Department in 1998 and 1999 that omitted a routine clause calling for a boost in payments if oil prices rose above $34 a barrel. Oil rose to well over $70 a barrel last year and is currently trading around $50, but the government has been unable to collect higher fees to reflect those rising prices.

In prepared testimony Thursday, Mark Gaffigan of the Government Accountability Office told the Senate Committee on Energy and Natural Resources that the flaws in the leases, together with the recent rise in oil prices, could cost taxpayers up to $10 billion in lost royalty revenues. So far, he said, about $1 billion has been lost.

The dispute has been brewing for some time, but with a change in control of Congress, Democrats have made a priority of correcting the flawed leases. Republicans argue that the contracts are valid and note that the mistake happened under the Clinton administration’s watch.

Democrats counter that the Interior Department has been slow to fix the problem and collect the money. A nine-month investigation by Interior's inspector general concluded that senior officials of the department's Minerals Management Service — including its director — were made aware of the lease problem as early as 2004 but did nothing to address the issue, according to a report published in The New York Times Wednesday.

"The entire program is riddled with blatant mismanagement" that has allowed oil and gas companies to short change the federal government, Sen. Maria Cantwell, D-Wash., said  Thursday.

The House bill, which passed Thursday evening, would cut future tax breaks and subsidies for the oil industry and pressure companies holding the flawed leases to pay back royalties. The energy legislation was the last of six high-priority issues that House Speaker Nancy Pelosi, D-Calif., had pledged to push through during the first 100 hours of Democratic control. The bill passed by a 264-163 vote. The bill’s prospects are uncertain the Senate, where Democrats hold a narrow majority.

Democrats said much of $15 billion in revenue generated by the measure would be used to promote renewable fuels such as solar and wind power, alternative fuels including ethanol and biodiesel and incentives for conservation.

The legislation would impose a “conservation fee” on oil and gas taken from deep waters of the Gulf of Mexico and scrap nearly $6 billion worth of oil industry tax breaks that was a cornerstone of the Bush administration's energy policy.

Proponents of those tax breaks argue that encouraging offshore drilling is vital to maintaining U.S. oil production. But critics of the law, signed just as the industry was reporting billions in profits, argue that Big Oil has plenty of money to invest in drilling new wells without help from an already-strained federal budget.

Though the Democrats enjoy a slim majority in Congress, the politics of oil is governed as much by geographic as by party lines.

“There are 32 states  where oil and gas extraction industries and refining industries are big providers of  jobs and local taxes,” said Kevin Book, an analyst with Friedman Billings Ramsey. “They're going to look at ways to try to find an equitable solution on the federal basis without taking down revenues or jobs at home."

The Bush administration argues that a protracted dispute over royalties could be costly. Interior Assistant Secretary Stephen Allred told the Senate hearing Thursday that a three-year delay in leases would cut domestic oil production by 1.6 billion barrels and cost the government $13 billion in lost royalties over 10 years.

“We must be mindful of potential unintended consequences. Litigation could take years to resolve,” he told the committee.

So far, the MMS has negotiated voluntary payments of disputed royalties with five companies, but some 50 companies maintain they signed valid contracts and don’t owe the government any extra money.

Sen. Pete Domenici, R-N.M., one of the architects of the 2005 energy bill and now ranking member of the Senate Energy Committee, told CNBC Thursday that the majority of the disputed royalties are owed by Chevron.

“That's the one we got to get to do it. If they did it, everybody else would fall in line,” he said. "We are not talking about them doing anything wrong, but still it would be much better for them to get out of it, show the United States that they will pay their bill, and they'd like to bid in the future."

A Chevron spokesman said the company couldn’t comment on specific elements of the House bill or the disputed leases.

“We’re looking for mutually beneficial resolution to the issue, but we can’t get into the specifics of the discussion,” he said.

The Associated Press contributed to this report.


Discussion comments


Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.83%
Cash Back Cards 17.80%
Rewards Cards 17.18%