Letter to Secretary Of US Department of Interior Dick Kempthorne

September 14, 2006

The Honorable Dick Kempthorne
Secretary
US Department of Interior
Washington, DC

Dear Secretary Kempthorne:

Recent reports have indicated that a group of oil companies led by Chevron have discovered reserves estimated to be holding between 3 and 15 billion barrels of oil in the deepwaters of the Gulf of Mexico, in the so-called Jack Field. We are writing because of our concern that some of the deepwater leases issued in the late 1990's that cover this newly discovered field omit price thresholds based on market-price, rendering them royalty-free.

On Tuesday, The New York Times reported that the companies holding leases in this new oil field could avoid more than $1 billion in royalty payments to the federal government for the production of oil as the result of the lack of price thresholds. As reported in The New York Times, Chevron and its partners, Devon Energy and Statoil ASA of Norway, have six leases in the Jack oil field, approximately 175 miles off the coast of Louisiana. According to the article, two of these leases would allow the companies to avoid royalties on as much as 87.5 million barrels of oil per lease. While the exact total of the lost revenue would depend on the volume of oil actually produced and the price of oil at the time of production, The New York Times estimated that it could amount to as much as $1.5 billion in unpaid royalties if oil is $70 a barrel. What's more, even without this new field, the General Accountability Office has already indicated that the federal government and the American taxpayers stand to lose as much as $20 billion over the next 25 years due to the other existing 1998/1999 leases that were issued with no price thresholds, an omission the Department of Interior states was due to a clerical error.

While news reports have also indicated that the Department of Interior is currently seeking to persuade oil companies to voluntarily renegotiate these leases, we have already successfully offered a solution that would provide companies, including those with leases in the Jack Field, with a strong incentive to renegotiate. As you know, this past May when the Interior Appropriations bill was on the floor of the House, we led an effort to amend the bill to bar companies holding royalty-free leases from purchasing future leases from the federal government.

Our amendment overwhelmingly passed the House 252-165, and the Senate followed suit, adding similar language on its version of the bill. The American people own these resources and should get a fair return when we allow private, for profit, single-use development on these publicly-owned submerged lands. We are certain that our amendment creates a strong incentive for these companies to renegotiate the leases in question with the Interior Department at a time when oil companies are making record profits.

We took this action because the American people own the offshore public lands and we should properly collect royalty payments from companies that profit from the development of these public lands. We offered our amendment to create a solution to a problem that was begging for one. The recent discovery of the Jack Field only underscores the need for our amendment to prevail this year.

It is our hope that you will agree with the House and Senate decisions and will support a real solution that will provide a strong incentive for all oil companies holding these leases to renegotiate. Doing so will help put an end to billions of dollars of royalty free oil and gas production at times when prices are high and people are paying a greater share of their incomes on basic necessities like fueling their cars and heating and cooling their homes.

Inspector General Devaney's testimony on Capitol Hill on Wednesday painted a very bleak picture of how the Interior Department operates. Stopping short of labeling activities at the department as criminal, Devaney made it clear that Interior Department officials have consistently engaged in unethical and inappropriate behavior that has favored the interests of outside oil and gas companies over those of the American people. We realize that you have inherited these problems and we truly hope you take the steps to remedy them quickly. This is an opportunity for the Interior Department to start fighting for the American people rather than acquiescing to the oil and gas industry. We hope that you will begin this effort by supporting our attempt to correct these leases in error in the Fiscal Year 2007 Interior Appropriations bill.

We thank you for your time and we look forward to hearing your response on this critical issue at your earliest convenience.

Sincerely,
Maurice Hinchey, Ed Markey (and their seven House colleagues)

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