Press Releases

Chairman Feinstein Announces Measure to Close Oil Lease Loophole Included in FY’08 Interior Appropriations Bill

- Measure would help federal government recoup billions of dollars in lost oil lease royalties -

Washington, DC – U.S. Senator Dianne Feinstein (D-Calif.), Chairman of the Senate Appropriations Subcommittee on the Interior and Related Agencies, today announced that the FY 2008 Interior Appropriations bill includes a measure to close the loophole that has allowed oil and gas companies to pay no royalty payments for drilling on the Outer Continental Shelf for leases negotiated in 1998 and 1999. This has already cost the federal government approximately $1 billion in lost revenue, and unless corrected, is estimated to cost up to $10 billion.

Specifically, the FY’08 Interior Appropriations bill includes a provision, previously included in last year’s committee-reported bill, which requires that energy companies interested in bidding on new oil or natural gas drilling leases on the Outer Continental Shelf must agree to renegotiate their existing contracts on which they are paying no royalty payments as a result of the government error. This would prohibit oil and gas companies from receiving any future offshore drilling leases unless they agree to renegotiate their 1998/1999 leases. 

“Hardworking American families are facing record gas prices at the pump while energy companies are reaping billions of dollars in profits.  Yet for nearly a decade, an administrative error has allowed oil and gas companies to drill in federal waters for free. This has already cost taxpayers $1 billion in lost revenue and will cost billions more unless we take action now,” Senator Feinstein said. “In today’s tough budget times, this simply doesn’t add up.  It’s time to close this loophole and put an end to these handouts to the energy companies. So, this bill will require oil and gas companies to renegotiate these flawed leases, or be barred from future drilling contracts. The goal has always been to recoup these lost billions, and this legislation, in my view, is the best way to do that.”

Under this provision, the companies who have not renegotiated will have a choice.

  • They can keep their existing leases royalty-free if they so choose, but be barred from bidding on new contracts, or
  • They can agree to renegotiate these leases in good faith and be able to participate in the bidding for new leases.

The Department of the Interior has been working to try to get energy companies to voluntarily renegotiate the leases, and some of them have. Shell, BP, Conoco-Phillips, Marathon Oil, and Walter Oil and Gas have voluntarily agreed to renegotiate their leases and pay royalties from the 1998-99 leases.  Many others have not.

The House has offered the same language except for one major difference.  The House language, sponsored by Representative Maurice Hinchey (D-N.Y.), does not provide an exception for companies who voluntarily agree to pay royalties on the 1998-99 leases.  The Senate bill does provide that exception.

Background

The Outer Continental Shelf (OCS) oil and gas royalty management program is managed by the Minerals Management Service (MMS).

In 1995, Congress passed the Deep Water Royalty Relief Act, which granted a royalty “holiday” to oil and gas companies drilling in deep waters for leases sold between 1996 and 2000. The measure reduced the amount of royalties that companies had to pay for drilling in American waters in the Gulf of Mexico. At the time, gas prices were fairly low, and the move was seen by many as an incentive to get petroleum companies to drill for oil and natural gas and keep energy production inside the United States.

In 1998 and 1999, the federal government issued a series of leases to oil and gas companies that did not include price thresholds. It is estimated that this omission will cost taxpayers as much as $10 billion over the next 25 years.

On November 9, 2005, the CEOs of the five largest energy companies testified before a joint Senate Committee hearing. In response to the question posed by Senator Wyden, “Is the President wrong when he says we don’t need incentives for oil and gas exploration?” every single one of the CEOs said “No.”

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