IHS Global Insight Perspective | |
Significance | The U.S. Supreme Court yesterday chose not to hear an appeal by the Department of the Interior (DOI) asking for permission to recoup oil and gas royalties from firms issued with specific federal offshore leases around a decade ago. |
Implications | The DOI had been seeking to recoup around US$350 million from Anadarko in relation to special leases issued between 1996 and 2000. Those leases were provisioned under the Deep Water Royalty Relief Act (DWRRA) 1995, which provided royalty relief to companies to encourage investment at a time of low oil prices. |
Outlook | The Supreme Court's decision effectively brings to an end the DOI's attempts to collect this revenue, which including not just Anadarko's leases but those of other firms too, could in the aggregate amount to at least US$19 billion; while the DOI will be unhappy with the outcome, recent initiatives to reform the organisation mean that the event could come to be seen as the turning point at which the Department changed its ways. |
The United States Supreme Court has decided not to hear the Department of the Interior (DOI)'s appeal against a lower court ruling, effectively preventing the federal government from recouping royalties for oil and gas leases issued to a number of firms just over a decade ago. The Supreme Court's decision yesterday not to hear the Department of the Interior vs. Kerr-McGee Oil and Gas Corp. case means that Interior's attempts to collect that revenue have now come to an end. Speaking of the decision, DOI Secretary Ken Salazar said "the oil and gas leases in question are leases that were issued between 1996 and 2000. The Department under the Clinton and Bush Administrations took the position that once the price of oil and gas reaches a certain level, oil and gas royalties should be collected…In my view, they were correct. We will work with all involved in the days ahead to determine the best way forward". The appeal was rejected without comment.
The DOI had been seeking to overturn a ruling by the U.S. Fifth Circuit Court of Appeals (based in New Orleans) that Anadarko, as owner of Kerr-McGee's assets, was within its rights to produce oil from specific deepwater Gulf of Mexico (GOM) federal leases without also paying royalties. The Department had been seeking to recoup some US$350 million from Anadarko, setting a precedent that could have resulted in further royalty collections of at least US$19 billion from other firms issued with these special leases back in the late 1990s.
Outlook and Implications
Provision was made for these leases through the Deep Water Royalty Relief Act (DWRRA) 1995, which provided royalty relief on production volumes to companies as an incentive to explore and drill in what was then a frontier hydrocarbon region at a time when oil prices were so low as to discourage such activity otherwise. The federal leases covered only specific deepwater regions within the GOM, and the DWRRA itself expired in 2000. It was from these leases that the Department, through the Minerals Management Service (MMS), had been seeking royalties, pushed in part by political pressure to be seen extracting more revenue from firms as oil and gas prices increased. The DWRRA, however, only ever had volume limitations rather than price thresholds, prompting Kerr-McGee—which was bought by Anadarko in 2006—to bring a lawsuit against the Department's attempts to recoup greater royalties. A number of cases and appeals have been heard since then, culminating, finally, with the Supreme Court decision yesterday.
While the decision is good news for Anadarko and others holding these leases, it is also very clearly a blow to the authority of the DOI. The Department's authority had been tarnished anyway from a string of events ranging from lurid sex scandals at the MMS to failed accounting practices missing out on millions of dollars in royalty collections. Given that the DOI is now on a path to reforming its institutions, practices, and perhaps even the very nature of the fiscal regime itself, Salazar will be hoping that the Supreme Court decision draws a line in the sand between old DOI and new DOI.
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