Anadarko Royalties Case Spurs Oil Taxes Debate

No one really expected the federal government to just roll over and take a recent ruling that could prevent it from collecting billions in royalties on oil and natural gas leases, right?

So it should be no surprise the Obama administration asked Monday for an “en banc” review — that would mean bringing the case in front of the entire 5th U.S. Circuit Court of Appeals — in an effort to overturn the decision. In fact, many including an editorial by Oil and Gas Journal, predicted a fight on the heels of the January ruling made by a three-judge panel that said the Interior Department could not collect royalties from eight deepwater leases held by Anadarko Petroleum in the Gulf of Mexico. The original case was filed in 2006 by Kerr-McGee Oil & Gas, which is now owned by Anadarko.

Here’s the quick back story: Back in the ’90s when oil was low - and I mean $10 a barrel low - the government established the Deep Water Royalty Relief Act, which waived royalty fees on drilling in the Gulf of Mexico. The goal - and it did achieve it - was to encourage deepwater drilling, an expensive and risky endeavor, and to increase domestic production. The fees would return once prices rose above a certain threshold.

Here’s where problems started. For two years the Interior Department accidentally omitted the price trigger in thousands of leases. In the meantime, oil prices rose and companies exempt from paying royalties were busy generating lots of profits. The Interior Department was criticized for a general lack of oversight, they tried to get the money back and Poof! a lawsuit was filed that challenges the government’s right to impose any kind of price trigger.

How much are the taxpayers going to lose? The Government Accountability Office projected a loss of between $21 billion to $53 billion.

This latest move by the federal government is part of an increasing effort to raise taxes on the oil industry. Under President Obama’s 2010 budget proposal, for example, more than $31 billion would be raised over the next decade by axing the industry’s eligibility for a variety of tax breaks. The revenue would be used to promote and invest in clean energy.

The oil and gas companies have been the favorite nemesis of lots of folks out there - with embarassingly hefty quarterly and annual profits and the occasional oil spill it’s hard for a lot of everyday citizens to keep any love for the industry. Those profits have been cut into considerably since July, when the price for a barrel of oil reached a record $147.

Now that oil and gas is suffering, especially some of the smaller guys, should the government keep up the fight and should it implement more taxes? Many, including me, would argue the intent of the relief act was to encourage drilling and then eventually get royalties out of it. Unfortunately, the Interior Department has done such an amazing poor job in years past that we missed out on a lot of royalty revenue.

On the other hand, independent oil and gas companies, many of which take on these deepwater drilling projects, are cutting back or halting projects altogether. That raises new questions about taxing oil further. Frank Rusco over at GAO has told Congress that the oil and gas industry will likely ask for renewed royalty relief because of falling prices.

The U.S. government wants and needs to encourage domestic oil production and it could use some additional revenue to help develop other sources of energy. In a perfect world, we would be powering our cars and homes with alternative clean energies like wind and solar. The reality is we use oil, gas and coal. And as Chris Morrison pointed out earlier today, maybe nuclear energy is on the horizon.

It would seem that leaves the country at an impasse. There is some wiggle room. As the GAO pointed out in March, the Interior Department needs to dramatically examine and revamp its method of collecting royalties and developing leases. Compared to other countries and private leaseholders, the federal government is doing an abysmal job. This is a good starting point and maybe if the government is more effective at its job, we can see more revenue from the oil and gas industry without curbing domestic production.