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July 30, 2008

Oil Companies Escape Billions in Royalty Payments to Americans; Drilling Expansion Will Enrich U.S. and Foreign Corporate Freeloaders

Statement of Tyson Slocum, Director, Public Citizen’s Energy Program

A bureaucratic oversight has allowed 24 oil companies to avoid more than $1.3 billion in royalties for the privilege of extracting oil and natural gas from U.S. territory in the Gulf of Mexico - with foreign companies responsible for 55 percent of that total. But this $1.3 billion in forgone royalties pales in comparison to the $60 billion that Americans stand to lose in royalty revenue over the life of these leases. And if Congress repeals the moratorium on Outer Continental Shelf (OCS) drilling that has existed since 1982, these freeloading oil companies will be eligible to bid on new leases, providing them with more record profits while American families are left holding the bag. These 24 companies have posted a combined $365 billion in profits since 2006.

The list of the specific companies comes from a February 2008 U.S. Department of Interior memo recently obtained by Public Citizen. Four of the 24 companies (BP, Marathon, Shell and Walter Oil & Gas) signed voluntary agreements to pay royalties going forward, but they will not be required to pay the more than $200 million taxpayers have been denied on production that already has occurred.

The U.S. Senate is currently considering amendments to the Stop Excessive Energy Speculation Act of 2008 (S. 3268) that would repeal the congressional ban on offshore drilling. The U.S. House of Representatives is also considering measures in the Deep Ocean Energy Resources Act of 2008 (H.R. 6108) that would open up the OCS to new drilling. However, allowing new drilling in these areas will not significantly lower gasoline prices. According to a U.S. Department of Energy report, opening all areas off the coast of the Atlantic, Pacific and the Gulf of Mexico to new drilling "would not have a significant impact on domestic crude oil and natural gas production or prices before 2030." And new areas were opened for drilling in December 2006, when Congress passed the Gulf of Mexico Energy Security Act (Public Law 109-432), which authorized leasing 8.3 million acres in the Gulf of Mexico, 70 percent of which had been previously been protected under congressional moratoria.

It is irresponsible to allow companies that escaped the payment of potentially more than $60 billion in royalties because of a loophole to get access to more leases. There is legislative precedent to force companies to pay their fair share. The House passed a measure in January 2007 that would forbid oil companies from being awarded any new leases unless they renegotiate non-royalty leases from 1998 and 1999. President Bush opposed this part of the legislation, and the Senate has yet to adopt it. The U.S. is the third-largest producer of oil in the world, and 31 percent of that production comes from land owned by the federal government.

It should not come as a surprise that much of the impetus for opening the OCS comes from an expensive advertising campaign financed by Former House Speaker Newt Gingrich’s American Solutions for Winning the Future. When Gingrich was speaker, Congress passed the Deep Water Royalty Relief Act of 1995. It turned out to be an even bigger favor than Congress had intended.

Because of a bureaucratic oversight by the Department of Interior during the implementation of the act, oil companies that secured leases in 1998 and 1999 were exempted from royalties, regardless of the prevailing market price of oil. This stands in stark contrast to other, similar leases, which require the payment of royalties if the price of oil exceeds a certain threshold. The day the bill was signed in November 1995, West Texas Intermediate oil was trading at $18.28/barrel. With oil now trading nearly 600 percent higher at more than $120/barrel, these companies have been and will be extracting very valuable energy from public land without paying any royalties to American taxpayers.

In addition, there is widespread mismanagement of the royalty program that allows oil companies to underpay royalties, resulting in Americans being cheated out of hundreds of millions of dollars. Unless that is fixed, expansion of OCS development will also unfairly enrich oil companies, most of which are foreign. A former top auditor at the Department of Interior testified under oath in March 2007 that his superiors limited his ability to collect royalties from oil companies that were owed to the American people. In 2007, a jury in a case filed under the False Claims Act found that Kerr-McGee (now Anadarko), one of the holders of the no-royalty leases from 1998 and 1999, deliberately underpaid more than $7.5 million in royalties.

The 24 companies that have already been extracting oil and natural gas from the Gulf of Mexico royalty-free and have thereby underpaid $1.3 billion in royalties are Anadarko / Kerr-McGee (U.S.); ATP (U.S.); BHP Billiton (Australia); BP (U.K.); Carlyle/Riverstone (U.S.); Chevron (U.S.); Devon (U.S.); Encana (Canada); ENI (Italy); Howell Group, Ltd (U.S.); Marathon (U.S.); Marubeni (Japan); Newfield Exploration (U.S.); Nexen (Canada); Nippon Oil (Japan); Noble Corp (Cayman Islands); Occidental (U.S.); Petrobras (Brazil); Pioneer Natural Resources (U.S.); Plains Exploration (U.S.); Shell (Netherlands); Sojitz Corp (Japan); TotalFinaElf (France);Walter Oil & Gas (U.S.).

Additionally, the following 25 companies have yet to produce on these 1998 and 1999 leases but will produce royalty-free energy in the future: Callon Petroleum (U.S.); Cobalt International Energy (U.S. firms Carlyle/Riverstone and Goldman Sachs are equity partners); El Paso Corp (U.S.); Energy Partners Ltd. (U.S.); Helix Energy Solutions (U.S.); Energy XXI (U.S.); EOG Resources (U.S.); ExxonMobil (U.S.); Helis Oil & Gas, Houston Energy and Ridgewood Energy (U.S.); Hess Corp (U.S.); Maersk Oil (Denmark); Mitsui (Japan); Murphy Oil (U.S); Noble Energy, Inc./Samson Investment Co. (U.S); Petsec Energy Ltd.(Australia); Repsol (Spain); Revus Energy (Norway); Red Willow Production (U.S.); Statoil (Norway); Stephens Production Co. (U.S.); Tana Exploration (U.S.); Teikoku Oil (Japan); Transocean (U.S.); W & T Offshore (U.S.); Woodside Energy (U.S.).

To see a breakdown of the forgone royalties, go to http://www.citizen.org/documents/OCS.pdf.

To read the Department of Interior memo obtained by Public Citizen, go to http://www.citizen.org/documents/AlfredLetter.pdf.

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