The United States will not seek $1.3 billion (683 million pounds) in back oil royalties on some Gulf of Mexico drilling leases but is negotiating a deal with BP and Shell to make payments on those offshore tracts in the future, a government official said on Thursday.
The Interior Department's Minerals Management Service, which oversees offshore energy exploration, mistakenly left out language in drilling contracts signed with energy companies in 1998 and 1999 that would have ended a waiver of royalties when oil prices rose to certain levels.
Companies generally pay royalties based on 12.5 percent to 16.6 percent of the value of the oil they drill. But the department waived those royalties on initial oil production in the very deep Gulf waters where it is more expensive to drill.
The royalty break was supposed to end if oil rose to about $38 a barrel, but MMS did not include that provision in the 1998 and 1999 drilling leases.
Oil prices have soared well beyond that level this year, topping $78 a barrel this summer and bringing record profits to big oil companies.
MMS Director Johnnie Burton told reporters that BP and Shell are negotiating new contract terms for the 1998 and 1999 leases under which royalties would be due when the price of oil is over $38 a barrel. They would have to pay like everyone else, she said.
The agency is talking with other firms, including Chevron, to also get them to voluntarily pay.
Without a deal, the mistake could cost the government another $8 billion over the life of the leases, according to the Government Accountability Office.
While the MMS is negotiating new contracts terms to fix the problem, Burton said the government won't force any companies with the disputed leases to alter what she says are legally binding contracts.
When we sign a contract, we're suppose to read it, Burton said of the 1998 and 1999 leases. MMS messed up. Yes, it was a mistake. We have to live with it.
However, she said the MMS would accept any past royalties the companies may want to pay.
Burton said she has wondered why some oil companies were willing to voluntarily renegotiate their lease contracts and be subject to future royalties, while many other companies have not come in to talk with the MMS.
I think this is a matter of public perception of the companies...it's not very good for their image, she said. Maybe it's corny enough to say they care and maybe they want to make it right if they really feel we've made a mistake.
Under the deals being worked out, Burton said the MMS may be willing to accept some future oil royalty payments in the form of oil instead of cash.
She said the MMS could sell that oil in the market to raise cash or put the crude in the U.S. Strategic Petroleum Reserve, which is the country's emergency oil stockpile that the government is planning to expand.
There were 1,032 deepwater leases issued in 1998 and 1999 that got the royalty break, according to the MMS. Seventeen of those leases are currently producing and companies have indicated that 27 leases have oil or gas discoveries that are not yet producing.
There are more than 500 leases that are still active with no indications of oil or gas discoveries at this time and over 450 leases have been relinquished or have expired at the end of their lease term, Burton said.