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