Normally oil companies have to pay the standard royalty of 12% on oil or gas produced on lands owned by the federal government. Under the government’s royalty relief program, companies that drill in deep waters off the Gulf of Mexico don’t have to pay the royalty on the large quantities of the oil or gas they produce. But federal regulations also call for that special incentive to be suspended if market prices rise above certain threshold levels. Market prices for both oil and natural gas have been higher than those levels since the end of 2002. This means the 12% royalty should have been paid by all the companies operating in the Gulf of Mexico.

More than three dozen energy companies fell nearly $500 million behind last year on royalty payments they owed to the federal government for oil and gas extracted from public territory. This is according to Interior Department documents that were released in February. While most of that money was later paid after the government demanded payment, almost $60 million remains in dispute. The companies, which included major producers like Chevron, Shell, and ConocoPhillips, had claimed lucrative government incentives for drilling in the Gulf of Mexico even though the incentives were not supposed to be available if market prices climbed above certain “threshold prices.”

The Interior Department sent a report to lawmakers looking into the energy royalty program that revealed that the companies had failed to make the royalty payments. Forty-one companies were identified that incorrectly claimed about $493 million in “royalty relief” during 2004, when prices for both oil and gas climbed to record highs. The Interior Department said that 38 of the 41 companies paid $435 million in back royalties after it sent out warning letters in December. This was money that should have been paid shortly after the end of 2004. Three companies – Kerr-McGee, Forest Oil, and AGIP – continue to say they don’t plan to pay $58 million in additional payments.

Royalty payments for oil and gas extracted from federal territory have drawn increased attention from Congress since The New York Times reported in January that royalty payments had not climbed in line with the huge increase in market prices. Last year, the government received about $5.15 billion in royalties on natural gas and about $3.5 billion in royalties on oil. While royalties have climbed sharply since 2003, they are still barely even with amounts collected in 2001, at a time when market prices were much lower. One apparent reason for the shortfall is that the government has had trouble auditing the flow of money.

The companies receiving the letters demanding payment included many of the biggest producers in the Gulf of Mexico: Anadarko, Amerada Hess, British Petroleum, Chevron, ConocoPhillips, Kerr-McGee, Shell, and more than two dozen others. But several major producers, like Exxon Mobil, were not on the list. Exxon officials told the Times that their company stopped claiming royalty relief long ago, because market prices had exceeded the price thresholds.

Source: The New York Times

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