Catastrophe - Dick Morris [125]
By 2000, the Interior Department discovered its mistake, and the provision has been included in the leases issued since that date.497 But the mistake had been made—and to this day no one knows why.
There has never been a credible explanation—or, for that matter, any explanation—of why the 1998 and 1999 contracts left out that important price threshold provision. From all that anyone can tell, some idiot may simply have forgotten to include the clause in the leases.
So when energy prices began to rise, peaking in the summer of 2008, the government began to feel the loss in revenue that flowed from the inexplicable screw-up. When the number crunchers at Interior tried to increase the royalty payments of energy companies whose leases dated back to 1998 and 1999, the leaseholders told them to go fly a kite. The reduction in royalty relief wasn’t included in their contracts!
Even when oil prices rose as high as $160 a barrel in the summer of 2008 and gas prices followed suit, the lucky oil and gas companies were able to keep drilling for oil under those faulty 1998 and ’99 leases—without paying one cent in royalties to the government!
By 2006, the Interior Department estimates, the government had lost out on collecting $956 million in royalties on those 1998 and ’99 leases.498 When the data come in for 2007 and 2008, given the huge increase in energy prices, the tab will surely be higher. By the time all the oil and gas is pumped from those gulf wells, the Interior Department estimates, it may be out $10 billion.499
Not surprisingly, like true politicians, the Interior Department and Congress are now demanding that the oil and gas companies be gracious enough to overlook the government’s mistake and restore the royalty relief reduction clauses to those 1998 and 1999 leases.
Interior is taking the position that it didn’t have to include the underlying language providing that it would increase royalty payments if the price of energy rose. The department says that the federal law, passed in 1995, gives it the right to raise the required payments whether or not they’re specified in their leases.
Alas, the federal courts don’t agree.
Patricia Minaldi, a federal district court judge in Louisiana, ruled that the Interior Department could not make the Kerr-McGee Oil and Gas Corporation, one of the beneficiaries of the 1998 and ’99 leases, pay royalties just because energy prices had risen.500
But Judge Minaldi went further. Not only does the Interior Department not have the right to increase royalty payments for 1998 and 1999 where the leases do not give it that power, she ruled, it cannot even enforce the leases—written in other years—that explicitly provide for increases in royalty payments as the price of energy goes up! Not only will the Feds have to do without the royalties on those 1998 and 1999 leases where they forgot to include price thresholds, but they can’t even demand royalties based on a price threshold at all—even when the provision was included in the contract. Why? Because in imposing the threshold price, the court held, the Interior Department had gone beyond what Congress had authorized!
Sustaining Minaldi’s ruling, a federal appeals court ruled on January 12, 2008, that Kerr-McGee should not have to pay royalties on eight Gulf of Mexico leases from 1996 to 2000! The court ruled that Congress provided that the royalty reduction would be suspended only if the volume of oil and gas from the wells rose above certain thresholds—and that it was illegal for the Interior Department to demand that full royalties be paid if the price went up.501
Barry Russell, president of the Independent Petroleum Association of America, commented on the court ruling, saying:
The intent of Congress with the Deepwater Royalty Relief Act was to provide an incentive for companies to obtain royalty relief based on the volumes of crude oil and natural gas produced, rather than on a price threshold. [The Department of the Interior] subsequently installed a price threshold that would determine when