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Summary of Hearings on Outer Continental Shelf Policy (6-28-06)

  • June 21, 2006: House Committee on Government Reform, Subcommittee on Energy and Resources Hearing on "Deep Water Royalty Relief: Mismanagement and Cover-ups"
  • June 14, 2006: House Resource Committee Hearing on the "Domestic Energy Production through Offshore Exploration and Equitable Treatment of State Holdings Act of 2006"


House Committee on Government Reform
Subcommittee on Energy and Resources
"Deep Water Royalty Relief: Mismanagement and Cover-ups"
June 21, 2006

Panel 1
Geoffrey Heath, Attorney, Department of the Interior
Milo Mason, Attorney, Department of the Interior
Peter Schaumburg, Attorney, formerly with the Department of the Interior, now in private practice with Beveridge Diamond PC

Panel 2
Tim Cejka, President, ExxonMobil Corporation
John Hofmeister, President of U.S. Operations, Shell Oil Company
Randy Limbacher, Executive Vice President, Exploration and Production - Americas, ConocoPhillips Company
Greg Pilcher, Senior Vice President, General Counsel and Secretary, Kerr-McGee Oil Corporation
Paul Siegele, Vice President for Deepwater Development - Gulf of Mexico, Chevron Corporation

The Energy and Resources Subcommittee of the House Committee on Government Reform met on June 21, 2006 to investigate the Department of the Interior's (DOI) mismanagement of deepwater royalty relief. The Deep Water Royalty Relief Act of 1995 was enacted in order to encourage high-cost deepwater petroleum exploration and production in the Gulf of Mexico. To ensure that oil companies could recapture their initial capital investment - but not receive windfall profits - the royalty relief was limited by defined volume suspension and price thresholds. Companies would be required to pay royalties once the price thresholds of $28 per barrel of oil and $3.50 per 1000 cubic feet of natural gas were exceeded. However, price thresholds were omitted from the deepwater leases that oil and drilling companies entered into during 1998 and 1999, causing an estimated revenue loss of about $10 billion for the federal government.

Subcommittee Chairman Darrell Issa (R-CA) began the hearing by expressing his frustration about the absence of price thresholds in the 1998 and 1999 leases, and the fact that the errors were not fixed until 2000. "The fact that nobody raised an issue with the lack of price thresholds forces one of two conclusions: nobody reviewed the leases and regulations, or everyone reviewed and knowingly approved the faulty leases and regulations," Issa said. "Either scenario is unacceptable."

According to Paul Siegele, Vice President of Deepwater Development for Chevron Corporation, his company did notify the DOI's Mineral Management Service (MMS) office in 1998 about the missing price thresholds, and held a meeting with MMS officials later that year. A DOI attorney, Milo Mason, also testified that he realized in 1999 that the price thresholds were missing from the leases. However, Mason admitted that he never formally documented his discovery or notified company officials in writing. In response, Chairman Issa criticized the DOI's lack of accountability and expressed disbelief that the agency has no paper trail relating to the missing price thresholds.

Chevron Corporation and Shell Oil Company executives expressed a willingness to renegotiate the terms of the leases. John Hofmeister, the President of Shell Oil Company, stated that the company "is a proponent of price thresholds on deepwater royalty relief…but does not believe that royalty relief is necessary in the current commodity price environment." Hofmeister added that Shell is prepared to enter into a dialogue with the DOI and correct the 1998-99 lease errors.

In contrast, ExxonMobil Corporation and Kerr-McGee Oil Corporation executives are opposed to renegotiating the 1998-99 leases. Tim Cejka, the President of ExxonMobil Corporation, explained that "contract sanctity is critical to [ExxonMobil's] business decisions. Any change of prior year lease terms and conditions would indicate that the United States government does not place a high value on contract sanctity." Cejka added that his company had also noticed the missing price thresholds in 1998, but had "assumed that the price thresholds were left out intentionally to provide an additional incentive."

Kerr-McGee Oil Corporation is not only opposed to renegotiation of the leases, but also to price thresholds in general. Greg Pilcher, Senior Vice President of Kerr-McGee, testified that his company is refusing to honor the price thresholds from all of the leases for the 1995 to 2000 period. Kerr-McGee is currently involved in litigation with the DOI that challenges the agency's authority to set price thresholds.

The hearing ended with a request from Chairman Issa to all witnesses to voluntarily provide any external correspondence or documentation that may be relevant to understanding the royalty relief mismanagement in 1998-99. Issa also noted that there will unquestionably be more hearings on the issue in the near future - hearings that will involve officials from the DOI. "Clearly there is more to this story, and we are closer to getting to the bottom of it," he concluded.

For the full text of witness testimony, click here.



House Committee on Resources
Hearing on H.R. 4761, the "Domestic Energy Production through Offshore Exploration and Equitable Treatment of State Holdings Act of 2006"
June 14, 2006

Johnnie Burton, Acting Assistant Secretary, Land and Minerals Management, U.S. Department of Interior
Senator Frank W. Wagner, Virginia State Senate
Colleen M. Castille, Secretary, Department of Environmental Protection, State of Florida
Charlotte Randolph, President, LaFourche Parish, Louisiana
Daniel H. Lopez, President, New Mexico Tech
Terry Cleveland, Director, Wyoming Game and Fish Department
Carolyn McCormick, Managing Director, Outer Banks Visitors Bureau, Dare County Tourism Board of Directors
Jeff Angers, Executive Director, Coastal Conservation Association, Louisiana
Tom Fry, President, National Ocean Industries Association
Dr. Enid Sisskin, Director, Gulf Coast Environmental Defense

The House Resources Committee held a hearing on H.R.4671, a bill allowing states to voluntarily withdraw from the ban on oil and gas drilling. Currently, a presidential moratorium signed by President George H.W. Bush and renewed by President Bill Clinton forbids drilling off of American coastlines. Chairman Richard Pombo (R-CA) expressed his desire to see this bill enacted during his opening statement. "Congress must establish a commonsense, flexible framework that balances the competing interests of different states and enhances the country's ability to increase energy production at the same time," said Pombo. Rep. Robert Jindal (R-LA) expressed his support for the bill because drilling royalties will help fund coastal conservation projects. "Thirty square miles of Louisiana coastline are disappearing a year, while the state does not receive any royalties for resources extracted from its coastline."

Several witnesses reviewed environmentally-friendly drilling practices. Johnnie Burton, the Acting Assistant Secretary for Land and Minerals Management, said modern offshore drilling platforms are built to ensure the amount of hydrocarbons released into the environment under current practices is minimal, especially when compared to natural seepage "The National Academy of Sciences indicates that 150 times as much hydrocarbon is released naturally than by industry," Burton said. Safety mechanisms have been installed to prevent release during natural disasters as well. During hurricanes Katrina and Rita, only one platform released hydrocarbons into the water. Automatic safety valves had shut off the flow of oil from wells before platforms were severely damaged. Furthermore, shipping oil from the Middle East is a higher risk than drilling. A source of energy closer to the United States reduces the need to ship oil and gas long distances.

Tom Fry, President of the National Ocean Industries Association, agreed with Burton's assessment. He mentioned several innovation and technology improvements that have made drilling for oil and gas environmentally safe. For example, a single platform can now service more than one well head. This allows a single platform to acquire hydrocarbons from a greater area and reduces the number of offshore drilling platforms. "Such an installation, if overlaid on a map of the Washington, DC area, would reach as far north as Columbia, MD and as far south as Mechanicsville, VA, and connect to a platform one mile above the city," said Fry. This reduces the cost of drilling as well as the amount of risk to the environment.

Several members of the committee voiced their support of H.R. 4761. Rep. John Peterson (R-PA) felt that the energy resources on the continental shelf belonged to the people of the United States as a whole, not just the state with the nearest coast. It's not right to limit the energy resources available to the rest of the country, he said. "I wish the Congress would get their heads out of the Florida sands," said Peterson. Rep. Thelma Drake (R-VA) also voiced support for H.R. 4761. "It is critical that we begin to explore our own domestic resources as we strive to achieve energy security in this country," said Drake.

Other witnesses voiced concerns about the potential environmental damage resulting from offshore drilling. The coastline of Florida could be especially vulnerable. "There are serious environmental risks associated with near-shore natural gas drilling," said Colleen M. Castille, Secretary of the Department of Environmental Protection in the State of Florida. "The potential environmental impacts resulting from routine discharges of drilling mud and rock cuttings associated with any drilling operation would also be amplified." Dr. Enid Sisskin, Director of Gulf Coast Environmental Defense, agreed with Castille. "Fish, marine mammals, sea turtles, and coastal and marine birds will be expected to be impacted by the drilling discharges, pollutants and trash from OCS operations. Any pollution in the effluent could poison and kill or debilitate these organisms and adversely affect the food chains and other key elements of the Gulf ecosystem," he said.


Sources: Hearing testimony.

Contributed by Tim Donahue, 2006 AGI/AIPG Summer Intern; Jessica Rowland, 2006 AGI/AIPG Summer Intern.

Please send any comments or requests for information to AGI Government Affairs Program.

Last updated on June 28, 2006.

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