Oil industry fights an angry Congress over lease loophole

Long the target of angry rhetoric about “windfall” profits, the oil industry now faces something more tangibly painful: a bipartisan push in Congress to force the industry to pay billions of dollars more in royalties to the federal government.

Long the target of angry rhetoric about “windfall” profits, the oil industry now faces something more tangibly painful: a bipartisan push in Congress to force the industry to pay billions of dollars more in royalties to the federal government.

Last month, the House approved an amendment to the Interior Department appropriations bill that seeks to force companies to renegotiate oil leases signed in 1998 and 1999. The language prohibits the department from negotiating new oil leases with companies that hold leases from those years.

Oil lobbyists are working to prevent the Senate from doing the same in part by arguing that the House language could lead to more foreign involvement in energy production in the Gulf of Mexico, a key domestic resource.

Sen. Dianne Feinstein (D-Calif.), a member of the Interior Appropriations Subcommittee, is expected to offer language similar to the House provision when that panel marks up the spending bill.

The leases in question waived royalty payments to encourage companies to drill in deeper Gulf of Mexico waters, a more technically challenging and therefore more costly endeavor. The royalty-waiver provision is typical of leases of this type. What wasn’t, however, was that the contracts did not also include the standard stipulation that royalties would be reinstated if oil prices rose above a preset threshold, which has long since been crossed.

With the number of sympathetic ears on Capitol Hill seemingly dwindling, oil companies are raising the specter that companies controlled by foreign governments — such as China National Offshore Oil Co., or CNOOC, which Congress successfully kept from buying the American firm Unocal last year — would gain a foothold in U.S.-based energy production if the House language is approved.

“This could outsource production in the Gulf of Mexico to foreign governments like the Chinese,” said John Felmy, the chief economist at the American Petroleum Institute.

More than 50 companies hold leases from 1998 and 1999, according to the American Petroleum Institute. That is around 75 percent of the successful bidders in the last lease sale, according to the industry.

Because most of those companies are either based in the United States or are foreign companies with long-standing U.S. ties, like BP, the bill effectively opens the Gulf to others that haven’t been major players there. Of those, CNOOC is probably the most mentioned by oil-industry lobbyists opposing the House provision.

Oil lobbyists are also drawing parallels with the proposed takeover of management of some American ports by a Dubai company, a sale that a united Congress quickly blocked.

In this case, the key assets are lucrative oil reserves beneath the Gulf of Mexico, oil lobbyists say.

But while the lobbying effort attempts to capitalize on perennial calls for greater “energy independence,” some lobbyists acknowledge that they face a Congress that appears increasingly eager to punish them for high gasoline prices.

“The message is that you guys have a major problem and we are not going to defend you,” one lobbyist for a major oil company said of the House vote.

Oil companies would avoid paying as much as $20 billion in royalties over the next 25 years, the Government Accountability Office has found.

The industry also argues that blocking companies from future bids could also end up costing more because less competition for the leases will mean the bids for drilling rights will be lower.

Supporters of the language say all that companies have to do to participate in future lease sales is to renegotiate the problem leases.

“Some oil companies say they don’t need subsidies, they don’t need tax breaks. They talk that way, and then Congress starts taking away some tax breaks and subsidies and they start singing a different tune,” said Jeff Lieberson, a spokesman for Rep. Maurice Hinchey (D-N.Y.), who along with Rep. Edward Markey (D-Mass.) sponsored the amendment to the interior bill.

The industry has long been on the defensive as gasoline prices rose. But the 252-165 margin of the House vote surprised some industry lobbyists and made them worry about their prospects in the Senate.

“We just kind of shook our heads and said, ‘Jesus. Do they know what they are voting on?’” said Don Duncan, a lobbyist at ConocoPhillips.

Duncan said that his company has not avoided paying any royalties because of the leases in question and that his company believes oil companies should not have relief from royalties when prices are so high.

But he agreed with critics that the amendment sets a bad precedent and could lead to greater foreign government participation in U.S.-based energy production.

Dan Naatz, a vice president for federal resources and political affairs for the Independent Petroleum Association of America, said his group is focusing its lobbying efforts on the principle of contract sanctity. He said companies have made business decisions based on the terms of those contracts, which were signed nearly eight years ago.

He also noted that the companies at the time did not push to remove price thresholds.

“We believe that these contracts are signed contracts,” he said. “A deal is a deal.”