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The New York Times: Oil Giants Fell Behind on Fees

Published: February 10, 2006
WASHINGTON, Feb. 9 — More than three dozen energy companies fell nearly $500 million behind last year on royalty payments the federal government says they owed for oil and gas extracted from public territory, according to Interior Department documents released Thursday.
While most of that money was later turned over after the government demanded payment, almost $60 million remains in dispute.
The companies, which included major producers like Chevron, Shell and ConocoPhillips, had claimed lucrative government incentives for drilling in the Gulf of Mexico even though the incentives were not supposed to be available if market prices climbed above certain “threshold prices.”
The Interior Department, in a report sent to lawmakers looking into the energy royalty program, identified 41 companies that incorrectly claimed about $493 million in “royalty relief” during 2004, when prices for both oil and gas climbed to records.
The Interior Department said that 38 of the 41 companies quickly paid $435 million in back royalties after it sent out warning letters in December, months after the money should have been paid.
But three companies — Kerr-McGee, Forest Oil and AGIP — continue to protest $58 million in additional payments.
Indeed, Kerr-McGee officials suggested on Thursday that they planned to challenge the government's legal authority to impose price thresholds in the first place.
“We pride ourselves on operating legally,” said John Christiansen, a spokesman for Kerr-McGee, which is based in Oklahoma City. “Now the Interior Department is claiming it has the power to cancel royalty relief granted by Congress.”
Mr. Christiansen said Kerr-McGee would fight the case if the government did not back down. “We'll take this issue to the federal court system if necessary,” he said.
Royalty payments for oil and gas extracted from federal territory have drawn increased attention from Congress since The New York Times reported last month that payments had not climbed in line with the huge increase in market prices.
Last year, the government received about $5.15 billion in royalties on natural gas and about $3.5 billion in royalties on oil. While royalties have climbed sharply since 2003, they are still barely even with amounts collected in 2001, when market prices were much lower.
One apparent reason for the shortfall is that the government has had trouble auditing the flow of money.
Under the government's royalty relief program, companies that drill in deep waters off the Gulf of Mexico do not have to pay the standard royalty of 12 percent on large quantities of the oil or gas they produce.
But federal regulations also call for that special incentive to be suspended if market prices rise above certain threshold levels. Market prices for both oil and natural gas have been higher than those levels since the end of 2002.
Administration officials said Thursday that they sent out letters to 41 companies in December, almost a full year after the end of 2004, reminding the companies that they had not been entitled to the incentives and needed to pay up.
The list included many of the biggest producers in the Gulf of Mexico: Anadarko, Amerada Hess, British Petroleum, Chevron, ConocoPhillips, Kerr-McGee, Shell and more than two dozen others.
But several major producers, like Exxon Mobil, the sixth-largest producer of natural gas in the Gulf of Mexico, were not on the list. Exxon officials said that their company stopped claiming royalty relief long ago, because market prices had exceeded the price thresholds.
Lawyers for some of the companies said that they should never have been included on the list released by the Interior Department, because the companies had actually paid the proper royalties or had not disputed the demand for additional royalties.
“We think it was inappropriate for Chevron and Unocal to have been included on the list,” said Donald Campbell, a spokesman for Chevron, which acquired Unocal last year.
“Chevron's policy is to pay royalties when deepwater lease price thresholds are exceeded,” Mr. Campbell said. “Based on our review to date, Chevron has consistently followed that policy and has paid royalties for the calendar years when lease price thresholds have been exceeded.”
Edmund L. Andrews reported from Washington for this article and Simon Romero from Houston.

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