Big Oil slides out of royalty payments

Offshore oil and gas platforms in the Gulf of Mexico

KAI RYSSDAL: As it happens, crude nudged up about 20 cents today. A touch over $64 a barrel. A price high enough to make it worthwhile to look for more. But there was a time oil was so cheap Congress had to persuade companies to go exploring. So it gave 'em breaks on royalties they'd ordinarily have to pay for offshore drilling. Those breaks were supposed to expire. But they haven't. And today a House subcomittee wanted to know why. Marketplace's Scott Tong was at the hearing this afternoon.

Hi, Scott.

SCOTT TONG: Hi, Kai.

RYSSDAL: Help us out here. Why did Congress give the oil industry these breaks?

TONG: Well, the way it's supposed to work is, when times are lean for the energy industry the feds say, "We wanna help." So, an industry drills in federal waters. The government says, "We won't charge you royalties for using our land." Now, that break, that favor is supposed to disappear when the prices of oil and gas go up. Presumably, the private market is providing enough incentive for the industry to explore and to drill so Uncle Same doesn't have to anymore.

That all works if there's an expiration clause in the contract — that when oil and gas go above a certain amount, there's no subsidy anymore. And, what we're finding out is in 1998 and 1999 there were more than a thousand contracts where that expiration clause was left out. So, the industry didn't have to pay any royalties. And these are long-term contracts — 25 years in some cases. So that's a lot of money, a lot of foregone revenue to the Treasury.

RYSSDAL: Well, exactly, how much foregone revenue?

TONG: Well, so far, we're talking $2 billion. That's according to government accountants. But since these leases are long-term, we could be talking $10 billion total. And that could include this new discovery we all heard about last week in the Gulf of Mexico. Turns out, several of the leases involved there, these complicated contracts, also go back to '98 and '99 where the companies don't have to pay royalities.

RYSSDAL: Alright, Scott. Congress has been looking into this, obviously. Today the inspector general of the Interior Department was up on The Hill. What did he have to say?

TONG: Well, the Interior Department's inspector general's name is Earl Devaney. And he's not a very popular guy at the Interior Department, because he's the cop. He's been poking around at what happened here. And what he found is the problem contracts were in '98 and '99, and that the mid-level employees at Interior . . . They tell him they didn't discover the problem until around 2000. And they decided not to tell the higher-ups.

Now, the top-level people at Interior have told investigators that, "We didn't find out about this until early 2006, when it showed up in The New York Times this year. What Mr. Devaney told Congress today is this is a case where there is a whole lot of finger pointing. It's a case of what he called bureaucratic bungling. And then he talked about the cultural problems at the Interior Department that he considers pervasive there.

EARL DEVANEY: Simply stated, short of a crime, anything goes at the highest levels of the Department of Interior. Ethics failures on the part of senior department officials, taking the form of appearances of impropriety, favoritism and bias have been routinely dismissed with a promise of not to do it again.

RYSSDAL: Wow. He didn't pull any punches, I guess. But let me ask you, in that vein, is there any indication that it's something conspiratorial between the oil industry and bureaucrats at the Department of Interior? Or is it just pure ineptitude?

TONG: There's no sense from his testimony that anything was intentional here, that there was an explicent favor that the government knew it was giving to the oil industry. After the hearing I also went up to him and I asked him, "Is there any sense that contracts signed today have that problematic language?" He said, No. He thinks the problem does not exist today, anymore. At the same time, he said throughout the hearing that these cultural and management problems at Interior, they're not fixed, either.

RYSSDAL: And I guess the the Interior Department gets its chance tomorrow, right?

TONG: Well, that's right. And it's not going to be a happy time for them.

RYSSDAL: Alright. Marketplace's Scott Tong in Washington. Thanks, Scott.

TONG: Alright, Kai, thanks.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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