Sometimes the federal government giveth, but it taketh away just as often. Later this year, the Department of the Interior will open for leasing more blocks in the eastern Gulf of Mexico near the so-called Sale 181 area. Yet, at the same time, it will hike the royalty rate on new deepwater leases from 12.5% to 16.7%. Let's hope it knows how to administer this change by writing accurate contracts the industry can sign.

It is unconscionable that some people in the Minerals Management Service knew as far back as 2000 that MMS messed up the wording in some deepwater royalty-relief leases signed in 1998 and 1999-but did nothing about it until recently, when the DOI inspector general went public with the problem.

Now critics are charging the oil industry with evil behavior, when the focus should be on incompetence, if not a cover-up, at DOI.

These were legal, non-negotiable, binding contracts between an oil company and the government. It is not the fault of any producer that a federal agency failed to do its job properly. Those contracts, flawed though they may be, should be respected and Congress should not penalize the oil companies or demand back royalty payments.

At press time, the Senate Energy and Natural Resources Committee was holding a hearing on the matter of oil and gas royalty management and calling for greater oversight on royalty reporting and collection.

Meanwhile, the Democratic-controlled House wasted no time. In mid-January, the chamber passed HR 6, the Clean Energy Act of 2007. The latter threatens the industry in several ways. It would increase certain taxes, and change the five-year amortization period on some E&P expenses to seven years for the six largest E&P companies. These are the ones likely to drill deepwater wells that lead to discoveries, such as Chevron's Jack or BP's Kaskida wells that garnered so much well-deserved attention. (Kaskida is the recipient of Oil and Gas Investor's 2006 Excellence Award for Best Discovery. More on this and other award winners is in this issue.)

The House bill would penalize the companies that signed the botched leases in 1998-99, demanding they renegotiate the leases-or they will never again be allowed to bid at federal offshore lease sales. This kind of coercion is unwarranted.

The bill also would repeal deepwater royalty incentives found in the Energy Policy Act of 2005.

"The U.S. offshore regulatory program is admired around the globe for its stability and predictability," says Barry Russell, president of the Independent Petroleum Association of America. "The action in the House sends the wrong message."

Any money raised by this tax and royalty increase in HR 6 would be directed to increased research on alternative energy.

Also in early January, California Gov. Arnold Schwarznegger unveiled stiff new environmental targets for his state. He has asked all Californian refiners and gasoline sellers to cut their fuels' emissions 10% by 2020, in a move to improve air quality, reduce the need for oil and boost the fortunes of alternative fuels, such as ethanol. Automakers have already been tasked with changing their engine technology.

This one-two punch of changing fuels and the engines they propel is another example of California prompting the federal government and other states to follow suit.

But what about R&D to help recover more oil and gas?

In two articles this month, we shine a spotlight on the role of R&D in this industry, and what can happen if government gets out of the way. Sadly, it appears the Department of Energy is reducing its funding of major oil and gas research in favor of stepped-up R&D on alternative fuels. We need both.

However, a new consortium of E&P and service companies, academics and government agencies is exploring ways to access the next trillion barrels of oil that could be produced domestically. We talked to several members.

And in the Gulf of Mexico, the Independence Hub in Mississippi Canyon 920 shows what a group of E&P companies, a service company and a midstream player can achieve when left alone to innovate. Connecting 10 deepwater fields, the hub will produce 1 billion cubic feet of gas a day. It boasts several industry firsts.

"Independence Hub is a solution to the problem of stranded reserves and will serve as the blueprint for future projects of this type," says Bob Phillips, president and chief executive officer of Enterprise Products Partners LP, which owns 80% of the mammoth hub. Helix Energy Solutions Group owns the balance. (See our cover story.)

Meanwhile, a retired CEO we know, who sold his company most profitably to a buyer that wanted to get into the Gulf, is living a life of ease as he contemplates his next move. His non-compete expired some time last year. He hasn't announced any new deals yet, but the private-equity guys keep calling him.

One observer jokingly asked him, "What's the matter-haven't they groveled enough for you yet?" The former company-builder says he's just enjoying this as if he was the belle of the capital ball.

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