How it happened or who’s responsible is a mystery eight years after the fact.
But what may have been a simple error — or perhaps something more ominous — has given a multimillion-dollar windfall to a group of oil and gas companies and could cost the government billions of dollars more in the years to come.
The Interior Department disclosed Wednesday that a provision was mysteriously deleted from hundreds of federal drilling leases in the late 1990s that would have required producers to pay royalties, once prices reached a certain level, on oil or gas taken from deep waters of the Gulf of Mexico.
In 1995, Congress exempted deep-water oil from royalty payments to spur development. But a price threshold was included in leases issued in 1996 and 1997 and again in leases sold in each year since 2000 that reinstates the royalties if market prices reach a certain level.
For some reason the language “was inadvertently dropped” from an addendum attached to more than 1,100 leases the Interior Department’s Minerals Management Service issued for 1998 and 1999, Walter Cruickshank, the agency’s deputy director, told a House Government Reform subcommittee Wednesday.
He said officials have not been able to determine who made the change, although he said it had to have been a human act, not a computer glitch.
“It is clear that there is no record telling people to take the language out,” he said, and it was widely known that the department wanted the price threshold restriction in any oil and gas leases as a matter of policy.
In the late 1990s, when oil prices were well below the threshold, the issue may not have attracted attention.
Rep. Darrell Issa, R-Calif., the subcommittee chairman, called the whole matter “suspicious.”
“This is a $7 billion word processing error,” Issa told reporters. He said some of the leases issued during those two years could remain in effect for as long as 85 years, so the government will be unable to collect royalty payments from oil and gas taken from those leases for decades to come.
While providing no specific number, Cruickshank said the government already has lost “several hundred million” dollars in royalty payments from the 1998-99 leases because they lacked the threshold language. If prices remain high, lost royalties “will be in the billions of dollars,” he acknowledged.
The price threshold where royalties must be paid changes yearly. Most recently it was set at about $34 a barrel for oil and $4.34 per thousand cubic feet for natural gas, according to Interior officials. The price of oil Wednesday on the New York Mercantile Exchange was nearly $62 a barrel and the government estimates it will remain in the $50-a-barrel range for years to come. Natural gas prices have been in the $9-per-thousand-cubic-feet range.
Issa said he planned to seek more documents from the Minerals Management Service, and said the issue may need to be investigated by the Justice Department to determine whether there was any deliberate wrongdoing.
When Congress enacted the royalty relief program for deep-water exploration and development, it was embraced by the Clinton administration as a way to spur more energy production in areas where the technology and prospects of success were still somewhat uncertain.
Cruickshank said he had no explanation for why the threshold requirement was taken out of the lease language when an addendum was changed for the 1998-99 leases to reflect other regulatory changes.
“Everyone knew the (price) threshold applied” but people didn’t focus on it because of low market prices at the time, said Cruickshank, who joined the agency in 1988 but was not involved in writing leases.
The mystery surrounding the 1998-99 leases is part of a broader question over whether any royalty relief should be given to the industry, given high oil and gas prices and huge industry profits.
The Interior Department estimates that as much as $66 billion worth of oil and natural gas that will be taken from the Gulf of Mexico between now and 2011 falls under the royalty relief law enacted by Congress in 1995. Much of that oil and gas will be subject to royalties under the price threshold provision, which is included in leases other than those issued in 1998-99.
Several oil and gas companies have challenged the legality of the threshold requirement in leases issued before 2001. Kerr McGee, a major natural gas producer, has given notice to the Interior Department that it will soon file a lawsuit arguing that the threshold provisions are illegal.
The Interior Department will “vigorously defend” the ability to impose royalties under a price threshold provision, said Cruickshank. “There’s a lot of money at stake.”