US Interior Department raises royalties

The Bush administration took steps to try to calm the furor in Congress over lost royalty payments on Gulf of Mexico oil and gas drilling as a result of a government mistake.

The Interior Department announced a sharp increase in the royalties that will have to be paid on future deep-water drilling leases in the gulf.

Oil companies will have to pay the government 16.7% instead of 12.5% under any new lease agreements. The department estimated that would bring in an additional $4.5 billion over 20 years.

The move was widely viewed as an attempt to placate lawmakers who have been sharply critical of the department for its failure to get oil and gas companies to renegotiate flawed 1998 and 1999 leases that allowed companies to avoid royalty payments even when making record profits with current high oil prices.

House Democrats have put legislation to force changes in the questionable leases at the top of their energy that will come up for consideration next week. The oil companies argue the leases amount to contracts that should be honored, although a handful have agreed to pay royalties on future production under the leases.

Congressional auditors put the lost federal revenue at as much as $2 billion so far and estimated it could total as much as $10 billion over the life of the leases. The Minerals Management Service has disputed the severity of the losses, but it has acknowledged hundreds of millions of dollars will not be paid under the 1998 to 1999 leases because of the mistake.

The higher royalty rate — along with opening some new offshore areas for drilling — will "increase the revenue that the federal government collects from oil and gas companies on behalf of American taxpayers," Interior Secretary Dirk Kempthorne said.

Democratic Reps. Edward Markey of Massachusetts and Maurice Hinchey of New York said they welcomed the higher royalty rates, but that they would continue to press for legislation calling on the oil companies to renegotiate the flawed leases.

The rate increase "shows that the administration is finally beginning to awaken from its deep slumber on deep-water drilling," said Markey.

Hinchey said that while he welcomes steps to increase the government's revenue from offshore oil and gas production "that does not excuse the fact that hundreds of existing leases from 1998 and 1999 remain royalty free."

Because of a government error, the leases did not contain language that would have imposed royalties once oil or gas prices reached a certain level — one far exceeded by today's market prices.

Five companies recently reached agreement to pay royalties on future production from the leases. But more than 50 other companies have made no such commitments, most of them refusing to discuss the matter with the Minerals Management Service, which manages the leasing program.