Government Loophole Gave Oil Companies $18 Billion Windfall

Source: By Hiroko Tabuchi, New York Times • Posted: Sunday, October 27, 2019

A Royal Dutch Shell oil rig in the Gulf of Mexico. The energy company is one of many that have profited from a mistake in the language of a decades-old law.
Eddie Seal/Bloomberg

The United States government has lost billions of dollars of oil and gas revenue to fossil-fuel companies because of a loophole in a decades-old law, a federal watchdog agency said Thursday, offering the first detailed accounting of the consequences of a misstep by lawmakers that is expected to continue costing taxpayers for decades to come.

The loophole dates from an effort in 1995 to encourage drilling in the Gulf of Mexico by offering oil companies a temporary break from paying royalties on the oil produced. However, the rule was poorly written, the very politicians who originally championed it have acknowledged, and the temporary reprieve was accidentally made permanent on some wells.

As a result, some of the biggest oil companies in the world, including Chevron, Shell, BP, Exxon Mobil and others, have avoided paying at least $18 billion in royalties on oil and gas drilled since 1996, according to a new report from the Government Accountability Office, a nonpartisan agency that works for Congress.

The companies, which hold government leases to drill in the Gulf, continue to extract oil and gas from those wells while not being required to pay royalties, a right the industry has gone to court to defend.

The National Ocean Industries Association, which represents the offshore industry, defended the arrangement. “There was no mistake in the law,” said Nicolette Nye, vice president at the association. If not for the law, she said, “we likely would not be producing U.S. oil offshore in record amounts today.”

But in an interview, the program’s original architect said he was surprised by the outcome. “That wasn’t our intent,” said J. Bennett Johnston, a former Democratic senator from Louisiana who had pushed for the original reprieve on royalties. “There should have been a provision that said it didn’t apply above a certain threshold” for oil prices, he said.

The loophole continues to cut into federal coffers. Royalties from offshore oil and gas are a significant source of revenue, bringing in almost $90 billion from 2006 through 2018, according to the agency.

Frank Rusco, a director of the G.A.O.’s Natural Resources and Environment team and the report’s author, said the findings are an extreme example of the Department of Interior failing to ensure that American taxpayers received a fair market value for the oil and gas extracted from public property.

“These leases sold 20 years ago might keep producing for decades. The amount of forgone royalties is going to continue to increase,” Mr. Rusco said in an interview. “It’s a strong case for Interior to review how it collects revenues on oil and gas.”

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The Interior Department said it “takes seriously” its responsibility to ensure that the American public receives a fair value for public resources. Still, some parts of the report “do not paint a representative picture” of the agency’s efforts, Casey Hammond, acting assistant secretary for land and minerals, said in the agency’s response, which was also released Thursday.

Department data shows that Chevron holds the most royalty-free leases in the Gulf, followed by Anadarko (now a part of Occidental Petroleum), Norway’s Equinor and Shell. Exxon Mobil, BP, and CNOOC, China’s state-run offshore oil and gas company, also own royalty-free leases, the data shows.

Chevron declined to comment. Shell, Occidental, BP, Exxon and Equinor referred queries to the oil industry group, the American Petroleum Institute. Calls to CNOOC’s Houston offices went unanswered.

Ben Marter, a spokesman for the A.P.I., said companies “took Congress at its word,” and any attempts to revisit the issue would be “engaging in a dangerous game of bait-and-switch.”

The report of the windfall to oil companies comes as the Trump administration has moved to further reduce the cost of offshore drilling for the industry, proposing to significantly weaken safety rules put in place after the deadly 2010 Deepwater Horizon explosion in the Gulf of Mexico. President Trump also earlier pushed to expand new offshore oil and gas drilling, though that plan was put on hold after being challenged in court.

The fossil fuel industry is facing heightened scrutiny on several fronts. The United Nations has warned that oil and gas production must decline substantially in the coming years if humanity is to avoid the worst effects of climate change worldwide, including more severe flooding, droughts and sea level rise. And Exxon Mobil this week is fighting charges in a New York City courtroom that the company lied to shareholders about the costs and consequences of global warming.

This week at a hearing of a subcommittee of the House Committee on Oversight and Reform, Exxon and other oil giants came under further attack.

“Major oil and gas companies, whose products are substantially responsible for global greenhouse emissions and the resulting climate emergency we now face, had early and repeated knowledge of the climate risk,” Sharon Y. Eubanks, who formerly directedtobacco litigation at the Department of Justice, told the committee. “They chose to mount a campaign of disinformation and denial.”

Exxon has said that the company has long acknowledged climate change is real and has called the charges “meritless” and “unconnected from the truth.”

The oil industry revenues detailed in Thursday’s report are a product of a very different era in America.

Today, thanks to the fracking boom, the United States is the largest oil producer in the world. But back in the late 1990s — when the country was heavily reliant on oil imports — the federal government wanted to boost American energy independence by encouraging more exploration in the Gulf. And since oil prices were low, Washington tried to make it worthwhile for oil companies by offering a brief reprieve on the royalties.

In 1995, Congress, working with oil executives, passed a law allowing companies that bid for new offshore leases to avoid paying the standard 12 percent royalty, or share of sales, on the oil and gas those leases eventually produced. The Interior Department leases tens of millions of acres of ocean territory to oil producers in exchange for an upfront bid for the lease, followed by royalties.

Supporters of the law argued that not only would the incentive reduce America’s dependence on foreign oil, but that it would in fact generate money for the government by prompting producers to bid higher prices for new leases.

But the new regulations omitted a crucial clause that had been supported by both Republicans and Democrats — that if average prices for oil and gas climbed above a certain threshold, companies would be responsible for paying the royalties. In 2006, when the federal government tried to impose royalties, an oil producer sued and won.

“It’s unfortunate,” said John Northington, who was an adviser at the Energy Department at the time of the initial lawmaking. “The legislation wasn’t clear about there being a price threshold. But it was never the intent that everybody get a free ride forever.”

The G.A.O. report lays out the long-lived consequences.

The report says that waiving royalties between 1996 and 2000, the final year royalty-free leases were offered, likely increased bidding for offshore leases by almost $2 billion. But forgone royalty revenue has been nine times greater, adding up to $18 billion through the end of 2018, the report found.

Because most of the leases are still producing oil, the financial benefits for oil companies will ultimately be higher, the report adds.

“This is handing out public money to special interests that don’t need them, don’t deserve them and aren’t paying their fair share,” said Raúl M. Grijalva, a Democrat from Arizona and chair of the House Natural Resources Committee. “Our laws and standards need to reflect the fact that public resources are there for the benefit of the public.”

The G.A.O. report recommends that Interior Department’s Bureau of Ocean Energy Management, which oversees offshore leases, enlist a third-party expert to assess whether government valuations of oil and gas resources is sound. The Interior Department has pushed back against some of the report’s findings and recommendations, including the need for a third-party examination.

Billy Tauzin, a former Louisiana congressman who sponsored the 1995 bill as a Republican, stood by its original intentions. “It was a deepwater incentive. It’s enormously risky and expensive, and drilling correctly and well requires much more than the initial investment,” he said in an interview.

Still, “the idea was to say we want to incentivize companies when oil prices are low,” he added. “But if the prices go up to a certain level, you don’t need the relief.”