U.S. Gulf’s Deepwater Oil Drillers Get $18 Billion Break from Decades-Old Law

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By Jennifer A. Dlouhy (Bloomberg) –The U.S. has forfeited some $18 billion tied to oil and gas production in the Gulf of Mexico since 2000 because of a decades-old law that gave energy companies a break on paying royalties when drilling in deep waters, federal investigators concluded Thursday.

The foregone revenue will keep climbing, as energy companies continue to harvest oil and gas royalty-free from dozens of affected tracts in the Gulf, long after lawmakers realized sloppy legislative writing prevented the government from making the price breaks temporary.

The dynamic is providing “corporate welfare at taxpayer expense,” said Democratic Representative Raul Grijalva, the head of the House Natural Resources Committee who requested the Government Accountability Office report.

At issue is a 1995 law Congress passed to spur deep-water drilling by waiving royalty payments that energy companies must make to the federal government for oil and gas extracted from federal waters. Some lawmakers said they aimed to make that royalty relief temporary if oil and gas prices or production jumped above certain levels.

But specific price thresholds didn’t make it into the statute or the lease contracts issued by the Clinton administration in 1998 and 1999. And in 2007, a federal court ruled the Interior Department couldn’t force companies to pay royalties on production from even more deep-water leases inked between 1996 and 2000, saying they were barred by that federal law. If Congress intended to impose price thresholds on royalty relief, an appeals court later said, “it certainly knew how to do so.”

The misstep is benefiting a slew of oil and gas companies, including Exxon Mobil Corp., Equinor Gulf of Mexico LLC, Chevron USA Inc. and Eni Petroleum US LLC, according to lease data reviewed by Bloomberg.

The Interior Department took issue with some of the GAO’s analysis but said it would consider the agency’s recommendations for changes to offshore leasing and royalty programs.

Oil industry advocates leaned on the 2007 court ruling affirming the royalty relief program.

“The courts have ruled there was nothing ambiguous about the 1995 act,” said Ben Marter, a spokesman for the American Petroleum Institute. “Those who would require the companies that took Congress at its word to now pay royalties retroactively are engaging in a dangerous game of bait-and-switch.”

Offshore oil and gas production in U.S. coastal waters is a significant source of revenue for federal coffers, bringing in almost $90 billion from 2006 through 2018, according to the GAO.

The lure of royalty relief sometimes spurred lucrative bidding on drilling rights in the Gulf. According to the GAO, the U.S. collected nearly $2 billion in additional bids from more aggressive bidding for deep-water tracts sold with the promise of royalty-free production from 1996 through 2000. However that initial jackpot was dwarfed by the foregone revenues ever since, the GAO said.

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