Bureaucratic Blunder helps over 100 Oil Companies Avoid Paying Royalties

Democratic lawmaker Representative Edward Markey of Massachusetts has used information from the Interior Department to form a report which claims that more than 100 oil and gas producers, including Chevron Corp. (NYSE: CVX), BP Plc (NYSE: BP), Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc, (NYSE: RDS-A) and ConocoPhillips (NYSE: COP), have benefitted from bungled leases awarded by the federal government.

The leases enabled the companies to drill for oil and gas in federal waters without paying, or at least paying at a much lower rate, any royalties.

Chevron was the biggest winner, avoiding an estimated $1.49 billion out of a total $2.62 billion that they should have paid for the right to drill.

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Under a law passed in 1995 any leases signed between 1996 and 2000 offered lower royalty fees in order to encourage drilling whilst oil and gas prices were so low; once the price rebounded above a certain level a clause in the lease stated that the royalties would return to the normal level.

Due to bureaucratic error, all leases signed in 1998 and 1999 failed to include a price threshold at which point the royalties would revert to normal levels once oil and gas prices rose.

In 2006, George Bush's administration asked companies to voluntarily renegotiate the leases in order to correct the obvious mistake; nothing happened. Representative Markey is now trying to push for legislation that would force the oil companies to renegotiate the leases.

By. James Burgess of Oilprice.com