Article: Democrats Plan Oil Royalties Inquiry

December 9, 2006
Democrats Plan Oil Royalties Inquiry
New York Times

By EDMUND L. ANDREWS
WASHINGTON, Dec. 8 — House Democratic leaders vowed Friday to pursue a broad overhaul of tax breaks and other subsidies to oil companies in January, saying that their first target would be an investigation of how the government collects billions of dollars in royalties on oil and gas produced on federal property.

“The Interior Department has a background of mismanagement, to put it mildly, in the collection of these royalties,” said Representative Nick J. Rahall II of West Virginia, a Democrat who will become chairman of the House Resources Committee next year.

Mr. Rahall said he planned a sweeping investigation of the Interior Department’s enforcement of royalty payments as well as the possible repeal of a 10-year-old law that allows energy companies drilling in deep coastal waters to avoid billions of dollars in payments.

“The oil and gas royalties system has never worked,” asserts a written summary of the committee’s top goals in the new Congress. “Instead it has proven to be a form of corporate welfare that has enabled oil and gas producers to undercut payments due the American people.”

In an opening slap at the industry, House Democrats tried, but narrowly failed, to pass a measure on Friday that would have pressured oil companies to give up a legal loophole that is expected to allow them to avoid as much as $10 billion in royalties over the next five years.

Though the measure was defeated, 205 to 207, Democratic leaders said they would resurrect it when they took control in January. Many Republicans conceded that the bill would almost certainly pass. But Democrats said they did not intend to stop there. Party leaders hope to repeal several billion dollars in tax breaks to oil companies, including a special deduction for “manufacturing” that was extended to drilling companies two years ago.

They also plan to investigate the Interior Department’s entire program of enforcing royalty payments, which has come under harsh criticism from lawmakers in both parties as well as from the department’s own inspector general.

“This is a warning to oil and gas companies,” said Representative Rahm Emanuel, Democrat of Illinois and chairman of the House Democratic Caucus. “When you get a Democratic Congress, you are going to get a cop on the beat.”

The dwindling political influence of the oil industry was apparent on Friday, even as House Republicans handed it a modest victory by passing a bill opening up new areas in the Gulf of Mexico for drilling.

The measure, contained in a catch-all bill that extends several dozen expiring tax breaks, would open up an additional 8.3 million acres on the outer continental shelf in the Gulf of Mexico.

Though energy companies had desperately wanted the oil drilling bill to pass, it was far less ambitious than either the industry or House Republicans had originally sought. The original House bill would have eventually opened up much bigger areas along the Atlantic and Pacific Seaboards and it would have given a big share of royalties to coastal states near the drilling.

But Senate Republicans had warned that they could not pass anything more ambitious than a limited expansion in the Gulf of Mexico. Indeed, in deference to Florida Republicans who feared that oil spills would jeopardize the state’s tourism industry, the bill would continue to prohibit drilling closer than 125 miles from the Florida coast.

But Democratic lawmakers have focused most of their ire on what they have called “royalty giveaways” to oil and gas companies.

To that end, their most immediate goal will probably be a bill aimed at renegotiating about 1,000 offshore drilling leases that the government admits are flawed. The leases, signed during the Clinton administration, could allow energy companies to escape as much as $10 billion in payments to the federal government over the next five years.

The leases offered “royalty relief” as an incentive to companies drilling in deep water. But in a mistake that Interior officials essentially ignored until this February, the leases omitted a standard escape clause that forced companies to pay the full royalties if oil prices climbed above $34 a barrel.

Because oil and gas prices have soared in the last several years, Interior officials now estimate that oil companies have already escaped about $1.3 billion in payments and could avoid several times that much in the next five years.

More than 50 companies, including Chevron, Exxon Mobil, Royal Dutch Shell and BP, hold the flawed leases. Chevron, which recently discovered a huge new oil field that extends over two of the leases, could potentially escape more than $1 billion in royalties on about 170 million barrels of oil.

House Democrats tried on Friday to pass a bill that would pressure companies to renegotiate the bungled leases by prohibiting them from acquiring any additional leases in the new areas that are about to be opened up for drilling. For the last six months, the Interior Department has tried without success to persuade companies to renegotiate their deals voluntarily.

“Time has run out,” said Representative Edward J. Markey of Massachusetts, who sponsored the Democratic bill with Representative Maurice D. Hinchey of New York. “They haven’t concluded any agreements; they don’t have any deals. Quite honestly, I don’t think they really want to cut any deals.”

Republican opponents did not argue about the merits of Mr. Markey’s bill, but insisted that attaching it to the broader measure would jeopardize its prospects in the Senate and should be postponed until the Democrats take control.

“This is 10 years overdue,” demanded Representative Bill Thomas, a Republican who is the departing chairman of the House Ways and Means Committee.

“Can’t we make this 10 years and 20 days overdue?”