Big Oil's Big Windfall

Editorial

New York Times

March 28, 2006

A public already groaning under huge deficits does not need more red ink. An oil industry already rolling in record profits does not need more tax breaks. But both are sure to happen unless some way can be found to claw back from a decade's worth of Congressional and administrative blunders, aggressive lobbying and industry greed.

According to a detailed account in Monday's Times by Edmund L. Andrews, oil companies stand to gain a minimum of $7 billion and as much as $28 billion over the next five years under an obscure provision in last year's giant energy bill that allows companies to avoid paying royalties on oil and gas produced in the Gulf of Mexico.

The provision received almost no Congressional debate, in part because Congress was lazy and in part because the provision was misleadingly advertised as cost-free. The giveaway also seemed a natural sequel to an earlier measure passed in 1995 to provide royalty relief. But that measure came at a time when oil prices, and new investment in oil and gas exploration, had declined. It also included an important safety valve: in any year when oil prices exceeded a threshold, about $34 a barrel, companies would have to resume paying royalties.

However, in what appears to have been a bureaucratic blunder, the Clinton administration omitted that crucial escape clause in all offshore leases signed between the government and the oil companies in 1998 and 1999. It seemed a harmless mistake at a time when oil prices were still below $20 a barrel. But times changed. Prices have been above the cutoff point since 2002, and an estimated one-sixth of production in the Gulf of Mexico is still exempt from royalties for no good reason whatsoever.

That blunder was compounded, again and again. First, a court decision in 2003 effectively doubled the amount of oil and gas exempted from royalties. Then the Bush administration offered special exemptions for "deep gas" producers, drilling more than 15,000 feet below the sea bottom. Then came the 2005 energy bill, which essentially locked in the old incentives for five more years.

At least one oil company has the grace to be embarrassed by all this. "Under the current environment," one Shell official told Mr. Andrews, "we don't need royalty relief."

But some companies seem to want more. A lawsuit filed by Kerr-McGee Exploration and Production would greatly expand the royalty relief. If the suit succeeds, the lost revenue may rise to as much as $28 billion.

Edward Markey, a Democratic member of the House from Massachusetts, has proposed a bill that would keep any new contracts from granting relief when oil and gas prices were high, and would instruct the interior secretary to try to renegotiate existing contracts. That is a fair and overdue remedy.