The People of America's Oil and Natural Gas Indusry

Royalty Relief Works

Jane Van Ryan

Jane Van Ryan
Posted October 5, 2009

The U.S. Supreme Court today declined to consider an extremely important Fifth Circuit decision on royalty relief. This adds finality to the Fifth Circuit's unanimous decision that Congress, when it passed the Deepwater Royalty Relief Act, provided royalty relief based on volume, not price.

The Deepwater Royalty Relief Act was passed in 1995 when crude oil prices were low by historical standards ($18.40 average for the 1995 calendar year) as a means to increase U.S. oil production. To make deepwater drilling more attractive to investors, Congress authorized the MMS to waive or reduce the amount of money paid to the federal government on the initial volumes from oil-producing leases issued between late 1995 and late 2000. On the leases sold in 1996, 1997 and 2000, MMS specified royalty relief would be in effect only if oil and natural gas prices stayed below a certain level. But the price threshold language was not included in leases issued in 1998 and 1999.

A few years ago when crude oil prices were rising, MMS asserted that Congress intended for the price thresholds to be included in all of the contracts, and it sought additional royalty payments through voluntary agreements from oil companies that were producing oil under the 1998 and 1999 leases. With regard to the current case, MMS sent an "Order to Pay" to Kerr-McGee, informing Kerr-McGee that royalties were due on production from leases issued in 1996, 1997 and 2000. Kerr-McGee challenged this order and both the District Court and the Fifth Circuit held that MMS had no authority to impose price thresholds requiring payment of royalties.

Today's decision signifies that the government can only act within the limits prescribed by Congress. Just as importantly, it calls attention to the fact that the Deepwater Royalty Relief Act was a very successful program. By reducing costs associated with deepwater drilling in the Gulf of Mexico, the private sector was encouraged to invest billions of dollars in advanced technologies and drill in areas which would have been prohibitively expensive. The act helped boost Gulf of Mexico oil production by 50 percent in less than a decade, increase domestic supplies of energy, and keep jobs at home.

As API's Jack Gerard explained in a statement today, "The Deepwater Royalty Relief Act is an example of constructive Congressional policy that encourages the development of our domestic resources and achieved the desired results by creating jobs, generating government revenues and enhancing America's energy security. Going forward, we trust Congress will continue to pursue constructive energy policies that benefit the American people, while resisting the urge to take steps that attempt to change the rules of the game midstream and that discourage investment."