The Heat Is Online

Taxpayers To Lose $20 billion in Royalties to Oil Companies

G.A.O. Sees Loss in Oil Royalties of at Least $20 Billion

The New York Times, March 29, 2006


WASHINGTON, March 28  Incentives for oil and gas companies that drill in the Gulf of Mexico will cost the federal government at least $20 billion over the next 25 years, according to the draft of a Congressional report obtained on Tuesday.


The new estimates, prepared by the Government Accountability Office, also warn that $80 billion in revenue could be lost over the same period if oil and gas companies won a new lawsuit that seeks a further reduction in their royalty payments.


The report, delivered in a private briefing late Monday to House and Senate staff members, startled some of the program's longtime supporters and infuriated some critics.


The report is the first attempt by a government agency to calculate the soaring costs of a 10-year-old program that was created to encourage deepwater drilling when energy prices were low.


The program, known as royalty relief, allows companies to avoid paying the government royalties on much of what they produce from federal leases in deepwater areas of the gulf.


The Interior Department acknowledged last month that it would forgo about $7 billion in royalties over the next five years  even though it expected energy prices to remain near record highs.


The G.A.O., the nonpartisan investigative arm of Congress, came up with much higher cost estimates but over a longer stretch of time.

On a related matter, the agency's investigators cautiously endorsed the Interior Department's explanation about why royalty collections for natural gas had climbed far more slowly than market prices.


Such royalties were almost no higher in 2005, when gas prices reached records, than in 2001.


The New York Times reported in January that the main reason appeared to be a widening gap between the sales prices that companies were reporting to the government and the prices they were reporting to their own shareholders.


The G.A.O. disputed that, saying that the weak revenue collections last year appeared to result primarily from a decline in gas production that was more severe than the drop indicated in the Interior Department's published statistics.


The G.A.O. said the Interior Department's explanation was "quick and reasonable," and that royalties in 2005 had been held down by both a general decline in offshore production and the damage wrought by Hurricanes Katrina and Rita.


But the Congressional office cautioned that its analysis was based on a reshuffling by the Interior Department's Minerals Management Service of its published royalty statistics.


"We conducted limited verification of M.M.S. data and did not audit the accuracy of underlying M.M.S. records," the G.A.O. said.


On the larger question of the overall cost of royalty relief, the G.A.O. noted that the Interior Department, which runs the offshore leasing program, had never carried out a "robust" cost-benefit analysis of the original program or of incentives added in the last five years.


In what the G.A.O. said was a preliminary analysis, it estimated that the government would lose about $20 billion as a result of leases already signed.


But that loss would quadruple to $80 billion if the suit by energy companies succeeded.


In the lawsuit, filed by Kerr-McGee Exploration and Production the company argues that the Interior Department does not have the authority to suspend the royalty incentives if prices for oil and gas climb above certain "threshold" levels.


Members of Congress, including some who have supported the energy industry, said the G.A.O. figures raised new questions about the royalty relief program.


"I am extremely concerned about information that has recently come to light," Senator Jeff Bingaman, Democrat of New Mexico, the ranking minority member of the Senate Energy Committee, wrote in a letter on Tuesday to the departing interior secretary, Gale A. Norton.


"I write to inquire as to what you plan to do to address this situation and these significant potential losses to the taxpayers of our nation."

Critics of the program said they were infuriated.


"Every day, the news for taxpayers gets unbelievably worse," said Representative Carolyn B. Maloney, Democrat of New York, who has assailed the royalty-collection program for years. "When will we put a stop to this?"


The actual cost of such royalty relief has been shrouded in mystery almost since its inception.


Last month, the Interior Department confirmed that the costs were about to soar as a result of leasing blunders in the late 1990's and a court decision in 2003.


The G.A.O.'s most optimistic prediction calls for a loss to the government of $20 billion in royalties, even though this assumes that energy prices will be above the "threshold levels" over the next 25 years.


Half of that stems from a blunder during the Clinton administration, when officials omitted the price-threshold restriction from all offshore leases signed in 1998 and 1999.


The other half results from the legal victory by energy companies in 2003, which more than doubled the amount of royalty-free oil and gas they could produce.


But those costs would be eclipsed if Kerr-McGee won its new lawsuit against the Bush administration. The G.A.O. estimated that a Kerr-McGee victory would cost $60 billion over 25 years, on top of the $20 billion the government is already expected to give up.


The G.A.O. said it based its estimate on the assumption that crude oil would sell for about $45 a barrel, a level well below the $66.07 next-month futures price in New York on Tuesday, and that oil and gas prices would climb 2.1 percent a year.