Letter to Senate Majority Leader Bill Frist

The Honorable Bill Frist

Majority Leader

United States Senate

S-230 Capitol

Washington, DC 20510

Dear Senator Frist:

Serious concerns have arisen regarding the implementation of the federal government's oil and natural gas royalty program. Recent news reports and the administration's own statements suggest that the government may be unable to collect billions in royalties from certain leases of federal land and waters. With oil and gas prices at historic levels, there is no good reason for royalty relief incentives.

In an effort to promote the exploration and production of natural gas and crude oil in deep water, the Deep Water Royalty Relief Act of 1995 implemented a royalty-relief program that relieves eligible leases from paying royalties on defined amounts of deep-water production. This would be accomplished by allowing the Secretary of the Interior and the oil and gas companies to enter into leases with a defined volume suspension and price threshold. This incentive was intended to help companies that undertook these investments in particularly high-cost, high-risk areas to be able to recover their capital investment before having to pay royalties on their gross revenues. It came at a time when oil and gas prices were low and the interest in deep water drilling was lacking. At that time, the program was needed to encourage production and it helped achieve that goal. The American Petroleum Institute estimates that since 1996, natural gas production is up 407 percent and oil 386 percent.

However, during 1998 and 1999, price thresholds were not included in terms of the leases, thereby allowing companies to recoup their capital investments long before the expiration of volume suspension. The absence of price thresholds in these leases allows companies to benefit both from both high market prices and volume suspensions. The Mineral Management Service has said the failure to include price thresholds was not intentional, but a costly mistake-and one that must be corrected with some help from Congress.

On May 17, the House of Representatives during consideration of the Fiscal Year 2007 Interior Appropriations Bill debated and voted 252-165 to address this mistake. We do not necessarily believe the House proposal is the answer, but we should have an opportunity in the Senate to take up the issue. We want to correct the error by requiring the federal government to add price thresholds to all leases including those issued in 1998 and 1999.

We ask that you schedule an up-or-down vote on the issue at the earliest opportunity and no later than the August recess. Thank you for your prompt consideration of our request.

http://snowe.senate.gov/news.htm