Brian Fredieu

September 18, 2006

In light of the massive oil discovery in the Gulf of Mexico, Chevron and other companies are facing intense pressure from Congress to renegotiate flawed drilling leases issued in 1998 and 1999.

The leases stem from the Deep Water Royalty Relief Act passed by Congress in 1995. The Act provided royalty relief terms in the leases which were meant to provide incentives for deep water drilling and exploration to oil and gas companies. The price per barrel of oil was then 20 dollars. Companies that received these leases would be allowed to operate royalty-free until a certain production ceiling was reached, or if the price of oil went above 36 dollars per barrel. Each year between 1995 and 2000 the Interior Department was to promulgate a rule outlining the leasing terms. In a blunder by the Interior Department, the final rule promulgated in 1998, as well as the lease terms in 1999 did not contain the price threshold limits.

The new discovery by Chevron, Statoil ASA of Norway and Devon Energy Corp. is believed to be one of the biggest domestic finds on the books and contains as much as 15 billion barrels of oil. Chevron has acknowledged that two of the eight lease areas involved in the major Gulf discovery were among those leases issued in 1998-99. A memorandum issued by the House Committee on Government Reform reported that this translates into millions of barrels of oil and trillions of cubic feet of natural gas being sold at today's future market prices royalty-free. The GAO reports that this loss could cost upwards of 10 billion to the American taxpayer.

House Subcommittee on Energy and Resources, chaired by Rep. Darrell Issa (R-CA), has been holding hearings to investigate the matter. The Subcommittee has identified the Interior staff and attorney responsible for the lost language in the final rule. On September 13 the Subcommittee called Inspector General Earl E. Devaney who testified that accountability at the department was non-existent, policy routinely disregarded and responsibilities were dangerously stovepiped. "Simply stated, short of a crime, anything goes at the highest levels of the Department of the Interior", testified Devaney. According to Devaney staff of the Minerals Management Service of the department discovered the missing language in 2000, but failed to report it to the MMS Directorate.

The full Committee on Government Reform will hold additional investigative hearings on September 14 and will receive further testimony on the matter from the Deputy Secretary of the Interior and the Director of Minerals Management Service.

See additional sources:

¯ 63 Fed. Reg. 2605 (January 16, 1998).

¯ 43 U.S.C. § 1337 (1995).

¯ Press Release, Chevron Corp., Chevron Announces Record Setting Well Test at Jack (Sept. 5, 2006) available at www.chevron.com.

¯ Memorandum from Inspector General Earl E. Devaney to Members of Subcommittee on Energy and Resources (Sept. 13, 2006) (on file with author).

¯ Inspector General Earl E. Devaney, Testimony to Subcommittee on Energy and Resources (Sept. 13, 2006) (transcript available at http://reform.house.gov/ER).

¯ H. Josef Herbert, Chevron, Others May Avoid Oil Royalties, U.S. News and World Report Online (September 12, 2006) available at http://hosted.ap.org/dynamic/stories/C/CHEVRON_ROYALTIES?SITE=DCUSN&SECTION=BUSINESS&TEMPLATE=DEFAULT.