In an attempt to renegotiate the botched 1998-98 offshore oil and gas leases, Congress now appears to have decidedly chosen the “stick” over the “carrot.” Yesterday, the Senate Interior, Environment and Related Agencies Appropriations Subcommittee approved an FY2008 appropriations bill that would prohibit any company that refuses to renegotiate their ’98-99 offshore leases from bidding on future leases. The House energy bill (H.R. 6) now before the full Senate also contains a similar provision.
The Subcommittee’s decision is somewhat of a surprise considering that its chairwoman, Sen. Dianne Feinstein (D-CA), was only a few months ago considering a proposal to reward companies with 3-year lease extensions if they agreed to renegotiate. Oil companies have favored the “lease extension” proposal over alternatives, and, according to a Bloomberg article from May 4, the idea originated in talks with Chevron.
Sen. Jeff Bingaman (D-NM), chairman of the Senate Natural Resources Committee, had also originally considered taking a softer tone on the lease negotiations, but not anymore. The Houston Chronicle last night reported on a new tax measure sponsored by Sen. Bingaman that would effectively ensure that companies refusing to renegotiate their leases will still have to pay what they owe:
As the Senate continued its effort to pass an energy bill by week's end, the Senate Finance Committee voted 15-5 in favor of a plan to impose a new severance tax ranging from 12.5 percent to 14 percent on oil and natural gas produced from the Gulf of Mexico's federal waters.
While an offshore producer would be able to use its existing federal royalty payments as credit against the new tax, the provision would represent a significant hit for companies now enjoying relief from royalty payments.
Those receiving relief include operators drilling for deep gas deposits in the shallow waters of the Gulf, as well as companies that signed flawed deep-water lease agreements that failed to include provisions triggering royalty payments when oil prices reached certain levels. The U.S. Minerals Management Service, which administers federal oil and gas properties, entered into the defective leases in 1998 and 1999.
Assuming that either of these pieces of legislation become law, the 40 companies still enjoying the free ride provided by faulty offshore lease contracts won’t be able to stall another 3 years. They’ll either have to renegotiate in good faith or, if they still decide to hold out, face increased taxes and/or future leasing prohibitions.
-- John Pruett