Chevron Could Avoid Huge Royalties on New Field
A group of oil companies led by Chevron, which said last week that they had discovered a huge new oil field in the Gulf of Mexico, could avoid more than $1 billion in royalty payments to the federal government for the oil.
The potential bonus to Chevron and its partners stems from a mistake the Interior Department made in signing offshore leases in the late 1990’s for drilling in federal waters. The magnitude of the oil discovery — estimated in a range of 3 billion to 15 billion barrels — is likely to intensify a battle in Congress over incentives for drilling in publicly owned waters.
Under pressure from lawmakers, Chevron and other big producers have said that they would renegotiate their leases. But they have not said how much they are willing to give up, and the Interior Department has virtually no bargaining power under current law.
Chevron and its partners, Devon Energy and Statoil ASA of Norway, have six leases in the Jack oil field, about 175 miles off the coast of Louisiana. Two of the leases allow the companies to avoid royalties on as much as 87.5 million barrels of oil per lease.
The benefit, known as royalty relief, was supposed to be halted if the price of oil climbed above $36 a barrel. But that restriction was omitted on all leases signed in 1998 and 1999, including the two held by Chevron and its partners.
The exact value of the potential break on federal payments will depend both on the price of oil and how much of it comes from the two leases. At $70 a barrel, the Chevron group could save about $1.5 billion in royalties if the government agreed that both leases were contributing to Chevron’s production.
But the actual savings would be much lower if oil prices slumped to $40 a barrel. And the savings would disappear if the government insisted that none of Chevron’s output was coming from the two leases, but from the four not eligible for the break.
A spokesman for Chevron, Don Campbell, said Monday that “any conjecture about forgone royalties” would be “pure speculation and an academic exercise.”
The Chevron leases are the biggest, but hardly the only leases that allow oil companies to avoid royalties regardless of how high energy prices climb.
Even before Chevron and its partners confirmed the discovery last week, the Government Accountability Office, the investigative arm of Congress, had estimated that the Treasury could lose as much as $20 billion over the next 25 years.
On Wednesday, the House Committee on Government Reform will begin two days of hearings on how the original calculation came to be. Republicans have been eager to blame the Clinton administration, which was in office when the leases were signed.
But the Interior Department’s inspector general is expected to testify that the Bush administration may be in danger of making exactly the same move on new leases.
According to Congressional aides, the inspector general has uncovered evidence that midlevel Interior Department officials warned as recently as July that a new batch of leases could cost the government billions of dollars beyond the original misstep.
Republican lawmakers are also angry about the Interior Department’s response to the problem, which was first disclosed by The New York Times in March.
Representative Thomas M. Davis III of Virginia, chairman of the Committee on Government Reform, complained of “systematic delays” and said the Interior Department had withheld large volumes of “critical information” from Congressional investigators.
Chevron’s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990’s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.
Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.
The House passed the Democratic proposal, over objections from Republican leaders, as an amendment to the Interior Department’s spending bill. The Senate Appropriations Committee attached a similar measure to its bill, but the overall measure has been stalled for months.
The hearings this week are expected to focus on how the Interior Department blundered on the leases. The inspector general, Earl E. Devaney, has concluded that the leases were a mistake rather than a result of any collusion with industry.
But Mr. Devaney is also expected to say that the Interior Department continues to suffer from a “lack of accountability.” Investigators have combed through 5,000 e-mail messages and are believed to have found some written as recently as this summer in which frustrated midlevel officials warned that the Interior Department had not fixed the bureaucratic and procedural problems that led to the original mistake.
Representative Davis and Representative Darrell Issa, Republican of California and chairman of the Government Reform energy and resources subcommittee, accused the Interior Department in August of deliberately obstructing their investigation.
“We are deeply concerned that the department may have intentionally withheld critical information from the subcommittee,” the two lawmakers wrote in a letter on Aug. 3 to Dirk Kempthorne, the new Interior secretary. “If this is the case, then it has intentionally impeded this duly authorized Congressional investigation.”
A group of oil companies led by Chevron, which said last week that they had discovered a huge new oil field in the Gulf of Mexico, could avoid more than $1 billion in royalty payments to the federal government for the oil.
The potential bonus to Chevron and its partners stems from a mistake the Interior Department made in signing offshore leases in the late 1990’s for drilling in federal waters. The magnitude of the oil discovery — estimated in a range of 3 billion to 15 billion barrels — is likely to intensify a battle in Congress over incentives for drilling in publicly owned waters.
Under pressure from lawmakers, Chevron and other big producers have said that they would renegotiate their leases. But they have not said how much they are willing to give up, and the Interior Department has virtually no bargaining power under current law.
Chevron and its partners, Devon Energy and Statoil ASA of Norway, have six leases in the Jack oil field, about 175 miles off the coast of Louisiana. Two of the leases allow the companies to avoid royalties on as much as 87.5 million barrels of oil per lease.
The benefit, known as royalty relief, was supposed to be halted if the price of oil climbed above $36 a barrel. But that restriction was omitted on all leases signed in 1998 and 1999, including the two held by Chevron and its partners.
The exact value of the potential break on federal payments will depend both on the price of oil and how much of it comes from the two leases. At $70 a barrel, the Chevron group could save about $1.5 billion in royalties if the government agreed that both leases were contributing to Chevron’s production.
But the actual savings would be much lower if oil prices slumped to $40 a barrel. And the savings would disappear if the government insisted that none of Chevron’s output was coming from the two leases, but from the four not eligible for the break.
A spokesman for Chevron, Don Campbell, said Monday that “any conjecture about forgone royalties” would be “pure speculation and an academic exercise.”
The Chevron leases are the biggest, but hardly the only leases that allow oil companies to avoid royalties regardless of how high energy prices climb.
Even before Chevron and its partners confirmed the discovery last week, the Government Accountability Office, the investigative arm of Congress, had estimated that the Treasury could lose as much as $20 billion over the next 25 years.
On Wednesday, the House Committee on Government Reform will begin two days of hearings on how the original calculation came to be. Republicans have been eager to blame the Clinton administration, which was in office when the leases were signed.
But the Interior Department’s inspector general is expected to testify that the Bush administration may be in danger of making exactly the same move on new leases.
According to Congressional aides, the inspector general has uncovered evidence that midlevel Interior Department officials warned as recently as July that a new batch of leases could cost the government billions of dollars beyond the original misstep.
Republican lawmakers are also angry about the Interior Department’s response to the problem, which was first disclosed by The New York Times in March.
Representative Thomas M. Davis III of Virginia, chairman of the Committee on Government Reform, complained of “systematic delays” and said the Interior Department had withheld large volumes of “critical information” from Congressional investigators.
Chevron’s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990’s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.
Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.
The House passed the Democratic proposal, over objections from Republican leaders, as an amendment to the Interior Department’s spending bill. The Senate Appropriations Committee attached a similar measure to its bill, but the overall measure has been stalled for months.
The hearings this week are expected to focus on how the Interior Department blundered on the leases. The inspector general, Earl E. Devaney, has concluded that the leases were a mistake rather than a result of any collusion with industry.
But Mr. Devaney is also expected to say that the Interior Department continues to suffer from a “lack of accountability.” Investigators have combed through 5,000 e-mail messages and are believed to have found some written as recently as this summer in which frustrated midlevel officials warned that the Interior Department had not fixed the bureaucratic and procedural problems that led to the original mistake.
Representative Davis and Representative Darrell Issa, Republican of California and chairman of the Government Reform energy and resources subcommittee, accused the Interior Department in August of deliberately obstructing their investigation.
“We are deeply concerned that the department may have intentionally withheld critical information from the subcommittee,” the two lawmakers wrote in a letter on Aug. 3 to Dirk Kempthorne, the new Interior secretary. “If this is the case, then it has intentionally impeded this duly authorized Congressional investigation.”
Comments