Chevron Could Avoid Huge Royalties on New Oil Field

techs

Lifer
Sep 26, 2000
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http://www.nytimes.com/2006/09/12/busin...oil.html?_r=1&ref=business&oref=slogin

WASHINGTON, Sept. 11 ? A group of oil companies led by Chevron, which said last week that they had discovered a huge new oil field in the Gulf of Mexico, could avoid more than $1 billion in royalty payments to the federal government for the oil.

The potential bonus to Chevron and its partners stems from a mistake the Interior Department made in signing offshore leases in the late 1990?s for drilling in federal waters. The magnitude of the oil discovery ? estimated in a range of 3 billion to 15 billion barrels ? is likely to intensify a battle in Congress over incentives for drilling in publicly owned waters.

Under pressure from lawmakers, Chevron and other big producers have said that they would renegotiate their leases. But they have not said how much they are willing to give up, and the Interior Department has virtually no bargaining power under current law.

Chevron and its partners, Devon Energy and Statoil ASA of Norway, have six leases in the Jack oil field, about 175 miles off the coast of Louisiana. Two of the leases allow the companies to avoid royalties on as much as 87.5 million barrels of oil per lease.

The benefit, known as royalty relief, was supposed to be halted if the price of oil climbed above $36 a barrel. But that restriction was omitted on all leases signed in 1998 and 1999, including the two held by Chevron and its partners.

The exact value of the potential break on federal payments will depend both on the price of oil and how much of it comes from the two leases. At $70 a barrel, the Chevron group could save about $1.5 billion in royalties if the government agreed that both leases were contributing to Chevron?s production.

But the actual savings would be much lower if oil prices slumped to $40 a barrel. And the savings would disappear if the government insisted that none of Chevron?s output was coming from the two leases, but from the four not eligible for the break.

A spokesman for Chevron, Don Campbell, said Monday that ?any conjecture about forgone royalties? would be ?pure speculation and an academic exercise.?

The Chevron leases are the biggest, but hardly the only leases that allow oil companies to avoid royalties regardless of how high energy prices climb.

Even before Chevron and its partners confirmed the discovery last week, the Government Accountability Office, the investigative arm of Congress, had estimated that the Treasury could lose as much as $20 billion over the next 25 years.

On Wednesday, the House Committee on Government Reform will begin two days of hearings on how the original calculation came to be. Republicans have been eager to blame the Clinton administration, which was in office when the leases were signed.

But the Interior Department?s inspector general is expected to testify that the Bush administration may be in danger of making exactly the same move on new leases.

According to Congressional aides, the inspector general has uncovered evidence that midlevel Interior Department officials warned as recently as July that a new batch of leases could cost the government billions of dollars beyond the original misstep.

Republican lawmakers are also angry about the Interior Department?s response to the problem, which was first disclosed by The New York Times in March.

Representative Thomas M. Davis III of Virginia, chairman of the Committee on Government Reform, complained of ?systematic delays? and said the Interior Department had withheld large volumes of ?critical information? from Congressional investigators.

Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

The House passed the Democratic proposal, over objections from Republican leaders, as an amendment to the Interior Department?s spending bill. The Senate Appropriations Committee attached a similar measure to its bill, but the overall measure has been stalled for months.

The hearings this week are expected to focus on how the Interior Department blundered on the leases. The inspector general, Earl E. Devaney, has concluded that the leases were a mistake rather than a result of any collusion with industry.

But Mr. Devaney is also expected to say that the Interior Department continues to suffer from a ?lack of accountability.? Investigators have combed through 5,000 e-mail messages and are believed to have found some written as recently as this summer in which frustrated midlevel officials warned that the Interior Department had not fixed the bureaucratic and procedural problems that led to the original mistake.

Representative Davis and Representative Darrell Issa, Republican of California and chairman of the Government Reform energy and resources subcommittee, accused the Interior Department in August of deliberately obstructing their investigation.

?We are deeply concerned that the department may have intentionally withheld critical information from the subcommittee,? the two lawmakers wrote in a letter on Aug. 3 to Dirk Kempthorne, the new Interior secretary. ?If this is the case, then it has intentionally impeded this duly authorized Congressional investigation.?



Forgetting the fact about how suspicious it is that about a month after Chevron had to close part of the Alaska pipeline because of shoddy and cheap maintenance, Chevron suddenly announce a huge new oil find, the selling of America by our politicians of both parties is a disgrace.
 

ayabe

Diamond Member
Aug 10, 2005
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Let's not forget that Louisiana also doesn't get a share of the oil revenue that is generated from their offshore wells like others states do, namely Texas.
 

jrenz

Banned
Jan 11, 2006
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Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?
 

K1052

Elite Member
Aug 21, 2003
45,896
32,697
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Originally posted by: techs

Forgetting the fact about how suspicious it is that about a month after Chevron had to close part of the Alaska pipeline because of shoddy and cheap maintenance, Chevron suddenly announce a huge new oil find, the selling of America by our politicians of both parties is a disgrace.

Err...I think the pipeline problem was BP, not Chevron. There is a thread on it somewhere around here.
 

ayabe

Diamond Member
Aug 10, 2005
7,449
0
0
Originally posted by: jrenz
Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?



There's a problem that needs to be addressed, contracts that are fundamentally unfair should be torn up, regardless of who was running the show when they were drafted.
 

techs

Lifer
Sep 26, 2000
28,561
4
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Originally posted by: K1052
Originally posted by: techs

Forgetting the fact about how suspicious it is that about a month after Chevron had to close part of the Alaska pipeline because of shoddy and cheap maintenance, Chevron suddenly announce a huge new oil find, the selling of America by our politicians of both parties is a disgrace.

Err...I think the pipeline problem was BP, not Chevron. There is a thread on it somewhere around here.
Oops, blew it big time on the Chevron/BP thing.
Otherwise the post still stands.
thanks.

 

K1052

Elite Member
Aug 21, 2003
45,896
32,697
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Originally posted by: ayabe
Originally posted by: jrenz
Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?


There's a problem that needs to be addressed, contracts that are fundamentally unfair should be torn up, regardless of who was running the show when they were drafted.

Then the oil companies would sue the governemnt for breach of contract get damages that would certainly spiral high into the billions (and most likely win).

A brilliant strategy. :thumbsup:

Just because a mistake is made on a contract or it turns out to be unfavorable to one party doesn't mean you can just throw it out. Contracts would be completely meaningless then.

The most effective alternative is to hold their feet to the fire on future leases.
 

ayabe

Diamond Member
Aug 10, 2005
7,449
0
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Originally posted by: K1052
Originally posted by: ayabe
Originally posted by: jrenz
Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?


There's a problem that needs to be addressed, contracts that are fundamentally unfair should be torn up, regardless of who was running the show when they were drafted.

Then the oil companies would sue the governemnt for breach of contract get damages that would certainly spiral high into the billions (and most likely win).

A brilliant strategy. :thumbsup:

Just because a mistake is made on a contract or it turns out to be unfavorable to one party doesn't mean you can just throw it out. Contracts would be completely meaningless then.

The most effective alternative is to hold their feet to the fire on future leases.



Contracts are dissolved all the time if they are too far out of the realm of fairness, I'd like to see this in court.
 

K1052

Elite Member
Aug 21, 2003
45,896
32,697
136
Originally posted by: ayabe
Originally posted by: K1052
Originally posted by: ayabe
Originally posted by: jrenz
Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?


There's a problem that needs to be addressed, contracts that are fundamentally unfair should be torn up, regardless of who was running the show when they were drafted.

Then the oil companies would sue the governemnt for breach of contract get damages that would certainly spiral high into the billions (and most likely win).

A brilliant strategy. :thumbsup:

Just because a mistake is made on a contract or it turns out to be unfavorable to one party doesn't mean you can just throw it out. Contracts would be completely meaningless then.

The most effective alternative is to hold their feet to the fire on future leases.



Contracts are dissolved all the time if they are too far out of the realm of fairness, I'd like to see this in court.


However this is a result of incomptence (on the part of a US gov agency no less). The lease holders have also invested considerable amounts in the field for which they would certainly have to be compensated. I have my doubts that a court would find the leases unfair and invalidate the contracts (as similar leases had been granted in the past).

It is a loser for the gov to try to invalidate the leases and Congress knows it. At best it would tie the issue up in court for years. The easier way is to prompt the companies in question into renegotiation buy running up the royalties on future leases or passing them over all together.
 

piasabird

Lifer
Feb 6, 2002
17,168
60
91
Does Louisiana get a special tax on the fish caught? I wonder??

Does the ocean belong the the Federal Government or the State? The Federal govenment has a right to set policy for all foreign and interenational and inter-state commerce.
 

ayabe

Diamond Member
Aug 10, 2005
7,449
0
0
Originally posted by: piasabird
Does Louisiana get a special tax on the fish caught? I wonder??

Does the ocean belong the the Federal Government or the State? The Federal govenment has a right to set policy for all foreign and interenational and inter-state commerce.

If this is in response to my earlier comment about LA, then the policy should be consistent for all states, but for oil revenues they are clearly not.
 

Finality

Platinum Member
Oct 9, 1999
2,665
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Mistake my a$$, someone in the government probably got a cushy contractors job if they included certain clauses in the contract.
 

XZeroII

Lifer
Jun 30, 2001
12,572
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Originally posted by: dmcowen674
Bottom line is the American people getting raped over and over again.

Wake up dump stupid sheeple.

WTF are you talking about? What are we supposed to wake up to? What does that comment have to do with this thread? Sheesh.
 

XZeroII

Lifer
Jun 30, 2001
12,572
0
0
Originally posted by: jrenz
Chevron?s huge potential savings highlight a dispute about how to remedy the leases signed in the late 1990?s. The Bush administration and many Republican leaders argue that those leases are binding contracts that cannot be changed except through an agreement by the companies.

Democrats acknowledge that the contracts are binding, but support a measure that would punish companies that refuse to renegotiate their contracts by prohibiting them from acquiring additional oil and gas leases.

So the Republicans want to honor crappy contracts that were signed under Clinton, while the Democrats want to bend the law to punish big business? Isn't that a bit hypocritical?

I was going to say the exact same thing. The Republicans admit that we made a mistake and now we have to sleep in the bed we made. The Democrats admin that we made a mistake and want to weasle out of it. "Yea, the contract is binding, but we're going to punish you if you try to use the contract." What a joke. That would invalidate just about all contracts ever signed. This is not an unfair contract. It was a stupid mistake and in buiness, stupid mistakes cost lots of $$$. Our gov't should be no different.
 

tweaker2

Lifer
Aug 5, 2000
14,478
6,901
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when billions of $$$ is at stake, "stupid mistakes" are rarely ever just that.

passing this occurrence off as "just a stupid mistake" would make alot of people happy, and very, very rich. it would also avoid the necessity of spending countless hours and $$$ in litigating a case that all parties involved would rather just bury in a deep deep hole. a tremendous amount of political pressure would be exerted by the oil industry to keep the contract intact and in this effort alot of careers would be ruined and made.

all the ingredients for making a case for collusion can be found in this situation, yet apparently, no-one is in the mood for committing occupational suicide by taking on the oil industry and the people that allowed this "mistake" to happen.

the omittance of a very specific and critical part of the contract that swings billions of $$$ one way or the other, when framed within the regulations, reviews and procedures that went into generating this contract by the multiple echlons of lawyers from both sides of the deal makes believing that the omission of this very crucial part of the contract was "just a stupid mistake" rather far-fetched or dare i say, even remotely possible.
 

Finality

Platinum Member
Oct 9, 1999
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Originally posted by: tweaker2
when billions of $$$ is at stake, "stupid mistakes" are rarely ever just that.

passing this occurrence off as "just a stupid mistake" would make alot of people happy, and very, very rich. it would also avoid the necessity of spending countless hours and $$$ in litigating a case that all parties involved would rather just bury in a deep deep hole. a tremendous amount of political pressure would be exerted by the oil industry to keep the contract intact and in this effort alot of careers would be ruined and made.

all the ingredients for making a case for collusion can be found in this situation, yet apparently, no-one is in the mood for committing occupational suicide by taking on the oil industry and the people that allowed this "mistake" to happen.

the omittance of a very specific and critical part of the contract that swings billions of $$$ one way or the other, when framed within the regulations, reviews and procedures that went into generating this contract by the multiple echlons of lawyers from both sides of the deal makes believing that the omission of this very crucial part of the contract was "just a stupid mistake" rather far-fetched or dare i say, even remotely possible.



My sentiments exactly. I'll take 10 to 1 odds the person/people who prepared/edited the contracts on the government side have a nice cushy job in something related to the oil majors.