Oil Royalties Talks Under Way

By H. JOSEF HEBERT

WASHINGTON – The Interior Department is putting aside $1.3 billion in royalties lost because of faulty drilling leases and is focusing its talks with oil companies on future production.

Acting Assistant Secretary Johnnie Burton said Thursday “it would be very hard to recoup” any of that revenue lost from oil already pumped under terms of the 1998-99 leases.

Because of a government mistake, the eight- to 10-year leases did not require royalty payments if the price of oil topped $36 a barrel. Oil prices have been well above that in recent years, reaching $76 a barrel at one point.

Burton told reporters that one-third of the 59 companies that have an interest in the leases have indicated they would like to settle the matter.

But only 10 companies “have actually come into the building” for discussions, she said. Shell Oil Co. and BP PLC “keep telling us they are very close to signing” an agreement to resolve the issue.

Chevron Corp. holds a large number of the deep water leases in the Gulf of Mexico, including two that are part of a major discovery announced this month. The company has said it is discussing a settlement.

On other matters, Burton:

-said the department was considering removing an environmentally sensitive area around Lake Teshekpuk on Alaska’s North Slope from an oil lease sale scheduled for next week. A federal judge in Alaska has blocked the sale because of concern that oil development near the lake would cause harm to wildlife. Burton said the department is examining ways the sale could continue and still comply with the judge’s order.

-defended the department against charges by four former auditors at the Minerals Management Service that they were prevented by their superiors from pursuing $31 million in underpayments from Gulf oil leases. The auditors sued in 2004 under a provision that would allow them to collect some portion of any settlement in the case. She said the auditors’ claims were not true and that “we feel strongly we are collecting what is owed.

Burton also is head of that Interior Department agency, which oversees offshore oil lease sales and collects the royalties. She said that in the case of the mistake in the 1998-99 leases, there are few options on recovering royalties, citing the sanctity of the contracts.

“The administration made it very clear they didn’t want any action that would breach a contract,” said Burton, declining to be more specific about who gave those directions. “It was not one single person” but a view expressed “at a lot of different meetings.”

She said she agrees with the view that “you’re going to have to live with what you signed.” She added, “To me, the word of the United States is sacred.” That limits the options in dealing with the oil companies in trying to recoup lost royalties, she acknowledged.

Burton said an attempt by Congress to force companies to negotiate by barring them from future oil lease sales in the Gulf could lead to a lawsuit and be found unconstitutional. A study by Congressional Research Service concluded there probably is not a constitutional issue involved.

She said nearly half of the roughly 1,000 leases issued in 1998-99 have expired. Of the 570 leases left, only 19 have had production; an additional 25 have had discoveries but no production to date.

She said since 1998 companies have avoided paying about $1.3 billion in revenue on oil already pumped from those leases, but said she could not estimate how much might be lost from future production if settlements are not reached. She called congressional estimates of $10 billion the results of “a lot of speculation.”