Thursday, March 02, 2006

Oopsy Daisey

This is a follow-up to the Jumping Jack Flash post, which was about the public oil and gas lease bonanza worth potentially billions of dollars the starving oil companies are enjoying at the taxpayers' expense.

Well, it now appears that this may have all been an innocent mistake -- "human error" -- known in most professional circles as "malpractice". Nothing untoward at all, and certainly not the fault or complicity of the oil companies, who simply knew a good thing when they saw it and jumped on it like a chook on a june-bug.

Reuters reports:
"Human error will allow energy companies to avoid paying billions of dollars in U.S. royalties normally owed on oil and natural gas drilled in the Gulf of Mexico because of language left out of the leasing contracts, the Interior Department told Congress on Wednesday.

A senior department official said language was "inadvertently dropped out" of about 1,100 lease contracts issued in 1998 and 1999 that would have ended royalty fee waivers for energy companies when the prices for crude oil and natural gas hit certain high levels.

Walter Cruickshank, deputy director for the Interior Department's Minerals Management Service which oversees offshore drilling, said that as a result of the error the government has already lost several hundred million dollars in royalties and stands to lose many billions more if energy prices remain high.

This was the first public explanation the agency has given on how the energy companies were able to get the leases without the oil and natural gas price thresholds.

Testifying about the matter before the House Government Reform's Energy and Resources Subcommittee, Cruickshank said the MMS has not been able to determine whether this was an honest mistake by an agency employee or a scheme to benefit the energy companies.

He also said nothing has been found in writing from the White House or the Interior Department instructing that the language be dropped from the contracts.

Cruickshank pointed out that at the time the MMS was rewriting its royalty regulations and whoever was handling the leasing contracts may have thought the price threshold language should be set aside until new provisions were finalized.

Rep. Darrell Issa, the subcommittee's chairman, said the matter should probably be referred to the U.S. Justice Department for investigation.

"I think it's suspicious," said Issa, referring to what he called the "$7 billion word processing error," which is the amount of royalties his office estimates the government could lose during the 85-year life of the leases.

Energy companies generally pay royalties based on 12.5 percent to 16.67 percent of the value of the oil and gas they drill.

When the 1998 and 1999 leases were issued energy prices were at historically low levels and the [new Bush/Cheney] government said it would forgo collecting royalties on a portion of production from ultradeep Gulf waters, where expensive exploration and drilling costs would have cut into company profits.

However, as with other leases before and after that two-year period, the royalty relief was supposed to end when oil and gas prices reached a high enough level.

It really didn't matter that the price thresholds were left out the 1998 and 1999 leases until recently, when oil and gas prices soared and the production from those leases is coming online in bigger volumes.

The royalty dispute has also become a thorny issue for the oil industry, which has earned record prices off high gasoline, heating oil and natural gas prices paid by U.S. consumers.

Kerr-McGee (KMG.N: Quote, Profile, Research) is one of the energy companies that got leases with the royalty break.

But the company is also suing over drilling leases entered into between 1996 and 2000, claiming the Interior Department did not have the authority to impose any oil and natural gas price thresholds that would restrict royalty relief.

Even though the price thresholds were left out by mistake in 1998 and 1999, Cruickshank said those leasing deals are legal contracts that can't be renegotiated unless the oil companies agreed to it.

He said a positive note was the number of leases issued during those two years was less than the contracts signed in the years before when the price thresholds were included.

"They didn't know they had a great deal," said Issa, referring to the companies that entered into the 1998 and 1999 contracts."
CNN is asking, Are the feds ignoring oil lease fraud?


Post a Comment

Links to this post:

Create a Link

<< Home