OIL & GAS ALERT: Department of Interior Requiring Retroactive Payment of Royalties on Entire Production Stream from Certain Deepwater Leases

    15 November 2007

    Over the past year, Congress has lamented that some federal deepwater leases issued between 1996-2000 provide companies finding commercial quantities of oil or gas with the ability to produce up to a specified volume, free of royalties. Convinced that the provision was intended to allow royalty-free production only if prices were below certain levels, the Department of Interior has begun requiring retroactive payment of royalties on the entire production stream from certain Gulf of Mexico Outer Continental Shelf deepwater leases.

    Former Senator John Breaux, the Senior Counsel in Patton Boggs’ D.C. office who represents the Ad Hoc Deep Water Exploration and Production Coalition (composed in part of several super-major oil companies, most headquartered overseas), noted that the leases brought in over $1.5 billion in additional lease bonus money to the U.S. Federal Government precisely because of the royalty provisions and were intended to be offered in that fashion. To read the Oil & Gas Journal article on the subject, please.

    In a related matter, the United States District Court, Western District of Louisiana, Lake Charles Division, in the case of Kerr-McGee Oil & Gas Corp. versus C. Stephen Allred, Assistant for Land & Minerals Mgt., and the Department of the Interior, ruled that the Department of the Interior "exceeded its Congressional authority" by requiring Kerr-McGee to pay royalties based on price threshold provisions.

    On November 6, 2007, Senator Breaux sent a letter to current Senate Energy Committee Chairman Max Baucus (D-Mont.) and Ranking Minority Member Charles E. Grassley (R-Iowa), advising of the far reaching implications of the enactment of legislation directly or indirectly imposing price thresholds on 1998-1999 deep water OCS leases.