SPECIAL REPORT | June 18, 2008

Will Senate Republicans Stand With the American Taxpayer or Allow Oil Companies to Reap a $60 Billion Giveaway from Offshore Drilling Leases?

"With oil at more than $50 a barrel, by the way, energy companies do not need taxpayers'-funded incentives to explore for oil and gas."

--President Bush, April 2005.


In January and February of 2006, the New York Times reported that the Bush Administration was allowing oil and gas companies to forego royalty payments on oil and gas leases in federal waters in the Gulf of Mexico. This decision by the Department of the Interior (DOI) could cost the American taxpayers more than $60 billion.[1]After calls from Congress for an investigation, Interior Secretary Kempthorneinstructed the DOI Inspector General to investigate the issue as well as claims of reported retaliation within the Department against whistleblowers. 

In March 2006, Kerr McGee[2], one of the major corporate beneficiaries of this situation, sued the federal government in an effort to obtain even more federal oil and gas at no cost. On October 30, 2007, a federal district court in Louisiana ruled that no matter how high the prices go, the companies do not have to pay royalties to the federal government on certain quantities of oil and gas under federal Outer Continental Shelf leases issued from 1996 through 2000 in deep water in the Gulf of Mexico. 

Senate Democrats have been urging President Bush to remedy this problem but the Bush Administration has failed to take action, failed to notify Congress what steps it is taking to ensure that the American taxpayer is protected, and opposed measures proposed by Democrats. The Administration's failure to take action comes at the same time that President Bush, the Senate Republican leadership, and Senator McCain are seeking to greatly expand offshore drilling in the United States. 

This Special Report provides a summary of the issue and the recent court case; an analysis of how much $60 billion could buy for the American taxpayer; and describes the failure of the Bush Administration to address the problem.


Summary of Issue and Kerr McGee Oil and Gas Corp. v. Allred

In 1995, Congress passed theOuter Continental Shelf Deep Water Royalty Relief Act, which allowed companies to explore for federally-owned oil and gas in deep water in the Gulf of Mexico without having to pay royalties to the federal government on certain produced quantities of oil and gas-unless the price of oil rose higher than $36 per barrel of oil. Leases were erroneously issued in 1998 and 1999 by the Department of the Interior that did not include the price trigger. Various oil and gas companies have argued that this means that they have no obligation to pay any royalties-no matter how high the price goes. 

On March 21, 2006, Kerr-McGee (now Anadarko) filed a lawsuit that challenged the government's ability to make the company pay for producing oil and natural gas beneath publicly-owned waters in the Gulf of Mexico for leases issued during a 5-year period. The lawsuit sought to overturn the requirement in law that the oil and gas companies must pay royalties on leases issued in 1996 through 2000. The lawsuit was filed despite clear congressional intent that royalties would have to be paid if the price of oil rose above $36 per barrel. 

The company has prevailed in federal district court, which ruled that "requirements on Kerr-McGee's eight deepwater leases that would require Kerr-McGee to pay millions of dollars in royalties"was unlawful and that the appropriate legislative authority to impose such royalties did not exist.[3]The ruling from the district court has been appealed to the United States Court of Appeals for the Fifth Circuit. While the appeal is pending, Democrats are seeking ways to address this giveaway to the oil and gas industry.


What is $60 Billion Worth?

In June 2008, the Government Accountability Office (GAO) issued a report on the costs that ruling in favor of Kerr-McGee would impose on the American taxpayer. The GAO report found that potential losses for the American taxpayer could reach $53 billion. However, the GAO report assumed the price of oil would be $100 per barrel and the price for oil today has hovered at record levels approaching $140. The actual amount that could be lost by the American taxpayer, therefore, could well exceed $60 billion.

The GAO report also suggested that the federal government could have to refund more than $1 billion in royalties that have already been collected if the court ruled in favor of Kerr-McGee. 

The collection of oil and gas royalties represents one of the federal government's largest sources of non-tax revenues-approximately $8 billion each year. Over the lifetime of the leases (25 years) in question, the United States government could use the $60 billion in one or more of the following ways:


  • Thirty-eight days of free gasoline for every American ($60.2 billion).
  • The conversion of 136 million registered passenger cars in the United States to run on E-85 ethanol ($68.2 billion).
  • A 2,700 percent increase in federal research and development funding for renewable electricity ($60.2 billion).
  • The government purchase of 2.85 million hybrid cars at the manufacturer suggested retail price (MSRP) of $21,500 to "green" the federal fleet ($61.2 billion).
  • The conversion of more than 58 million homes to produce and use renewable energy ($56.5 billion).
  • Scholarships for nearly 4.7 million students for room, board, and tuition at public four year universities (average cost $12,796) ($60 billion).
  • The repair or replacement of existing bridge deficiencies ($65.2 billion).
  • The purchase of approximately 45,000 Mine Resistant Ambush Protected (MRAP) vehicles-triple the number requested by the joint military services ($38.5 billion).
  • Reauthorization of the Children's Health Insurance Program (CHIP) to provide coverage for 10 million American children ($35 billion).
  • Putting 100,000 new cops on the street to patrol communities and help keep children safe ($7.69 billion).
  • The training of 6,000 new border agents ($882 million).

Will the Bush Administration Stand With the American Taxpayer?

On November 8, 2007, 43 Senators wrote to President Bush to ask what steps the Administration will take to address the situation and to ensure that the American taxpayer benefits from the extraction of the nation's valuable oil and gas reserves. To date, more than six months after he received the letter, President Bush has failed to reply. 

[1] Earlier this month, the Government Accountability Office (GAO) estimated that the lost payments could be as high as $53 billion over the lives of the leases on an assumed price for oil of $100 per barrel. Since the price of oil far exceeds that amount, the amount could exceed $60 billion. 

[2]Kerr McGee was purchased by Anadarko Petroleum in June 2006 for $16.4 billion.

[3] Kerr-McGee Oil and Gas Corp. v. Allred, No. 2: 06-CV-0439, 2007 U.S. Dist., Lexis 83424 (W.D. La. Oct. 18, 2007).





  • Ryan Mulvenon (224-3232)


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