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DEEP WATER ROYALTY RELIEF: MISMANAGEMENT

AND COVER-UPS

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 21, 2006

Serial No. 109–219

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

THOMAS ALEXANDER, Counsel

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 21, 2006 ............................................................................... 1

Statement of:

Hofmeister, John, president of U.S. operations, Shell Oil Corp.; Randy

Limbacher, executive vice president, exploration and production-Americas, ConocoPhillips Co.; A. Tim Cejka, president, Exxon Exploration

Co., ExxonMobil Corp.; Gregory F. Pilcher, senior vice president, general counsel and secretary, Kerr-McGee Oil Corp.; and Paul K. Siegele,

vice president for deep water development, Gulf of Mexico, Chevron

Corp. ............................................................................................................... 48

Cejka, A. Tim ............................................................................................. 63

Hofmeister, John ....................................................................................... 48

Limbacher, Randy ..................................................................................... 55

Pilcher, Gregory F. .................................................................................... 70

Siegele, Paul K. ......................................................................................... 82

Schaumberg, Peter J., attorney, Beveridge and Diamond, PC; Geoffrey

Heath, attorney, U.S. Department of Interior; and Milo C. Mason,

attorney, U.S. Department of Interior ........................................................ 30

Heath, Geoffrey ......................................................................................... 34

Mason, Milo C. ........................................................................................... 36

Schaumberg, Peter J. ................................................................................ 30

Letters, statements, etc., submitted for the record by:

Cejka, A. Tim, president, Exxon Exploration Co., ExxonMobil Corp., prepared statement of ........................................................................................ 65

Heath, Geoffrey, attorney, U.S. Department of Interior, prepared statement of ........................................................................................................... 35

Hofmeister, John, president of U.S. operations, Shell Oil Corp.:

Letter dated June 15, 2006 ...................................................................... 50

Prepared statement of ............................................................................... 52

Issa, Hon. Darrell E., a Representative in Congress from the State of

California:

Letter dated June 20, 2006 ...................................................................... 5

Prepared statement of ............................................................................... 15

Limbacher, Randy, executive vice president, exploration and productionAmericas, ConocoPhillips Co., prepared statement of ............................... 56

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 28

Mason, Milo C., attorney, U.S. Department of Interior, prepared statement of ........................................................................................................... 37

Pilcher, Gregory F., senior vice president, general counsel and secretary,

Kerr-McGee Oil Corp., prepared statement of ........................................... 72

Schaumberg, Peter J., attorney, Beveridge and Diamond, PC, prepared

statement of ................................................................................................... 32

Siegele, Paul K., vice president for deep water development, Gulf of

Mexico, Chevron Corp., prepared statement of .......................................... 84

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 21

(1)

DEEP WATER ROYALTY RELIEF:

MISMANAGEMENT AND COVER-UPS

WEDNESDAY, JUNE 21, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY AND RESOURCES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 9 a.m., in room

2154, Rayburn House Office Building, Hon. Darrell E. Issa (chairman of the committee) presiding.

Present: Representatives Issa, Watson, and Maloney.

Staff present: Larry Brady, staff director; Lori Gavaghan, legislative clerk; Tom Alexander, counsel; Dave Solan, Ray Robbins, and

Joe Thompson, professional staff members; Richard Butcher, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. ISSA. I would like to call this hearing to order.

Today the question remains of whether a lease with this many

signatures and counter-signatures is open to being signed without

people knowing it. In other words, can you have a lease that somebody didn’t know that there were inclusions or omissions with that

many people signing it, saying they have read it, evaluated it and

approved it?

But as I call this meeting to order, I would first like to thank

the witnesses for appearing today. Your willingness to answer

questions is an important step in this investigation. The subcommittee is investigating the absence of price thresholds in deep

water leases entered into during the period 1998 through 1999. The

results to date indicate a trail of gross mismanagement by the Department of Interior. This irresponsibility is likely to cost taxpayers almost $10 billion.

And I might note that when we started this investigation, figures

escalated from $5 million to $10 million.

In 1995, Congress enacted the Deep Water Royalty Relief Act to

provide financial incentives to companies to produce oil and natural

gas from our deep coastal waters. This came at a time when oil and

natural gas prices were low and the interest in deep water drilling

was lacking.

As an incentive, the act allowed oil and gas companies to forego

paying royalties to the Department of the Interior for a specific volume of oil or natural gas produced. This would allow companies to

recoup their capital investment before having to pay royalties. I repeat: the purposes of the royalty suspension was to allow companies to recoup their capital investment.

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To ensure that companies did not receive windfall profits, and I

will repeat that again, did not receive windfall profits, the act also

provided for price thresholds. In other words, a company would be

allowed to operate royalty-free until either a certain volume of production was achieved or the market price of oil or natural gas

reached a specific ceiling. These two provisions are known as volume suspensions and price thresholds, respectively.

The Interior Department was charged with the act’s implementation. As such, it was to issue a rule devising a royalty suspension

scheme that would impose volume suspensions and price thresholds. The interim rule was issued on March 25, 1996, by the Interior Department, the rule that was issued on that date was inadequate. It did not contain price thresholds. Instead, the final notice

of sale contained volume suspensions and price thresholds, and

leases signed in 1996 and 1997 included volume suspensions and

price thresholds in the addenda to leases, meaning in the body of

the lease signed by both parties. Exhibit 1 illustrates final notice

of sale, and exhibit 2 has the lease addendum.

This practice continued until the final regulation was issued in

January 1998. So for those two periods, both parties signed leases

that included the specific language. Again, all of you, as I noted,

saw the earlier amounts of counter-signatures. As we reviewed the

leases, those counter-signatures, in 1996, 1997, 1998, 1999, and

through today, are typical amount of people who either signed or

initialed leases.

For leases issued in 1998 and 1999, the price thresholds disappeared from the final notice of sale and individual leases. Instead, these documents referred to a Final Rule, 30 CFR Part 260,

regarding the royalty relief program. The Final Rule was printed

in the Federal Register in January 1998. The bottom line is that

this rule only contained volume suspensions and did not contain

price thresholds. In other words, it was also inadequate.

Had the price thresholds been included in leases in 1998 and 1999, the threshold would have been set at $28 per barrel of oil or

$3.50 per thousand cubic fee of natural gas. I don’t need to do the

math for you on what the prices of oil and natural gas have become.

In a previous hearing before this subcommittee, a senior career

official claimed that employees thought the Final Rule contained

the price thresholds and operated under that assumption, and that

is why there was a lack of price thresholds in the leases themselves, and they believed that it should not and did not trigger red

flags. How this could have happened is a mystery, since the Interim and Final Rules never contained price thresholds. I call your

attention to exhibit 4 on the screen.

Every one of these actions survived multiple levels of legal and

bureaucratic scrutiny. In fact, the lawyers who drafted and approved the interim regulations were the same lawyers who drafted

and approved the final regulations and every final notice of sale.

The terms and conditions in the leases were to be carbon copies of

those advertised in the final notices of sale.

I heard that this was explained as a case of ‘‘the right hand did

not know what the left hand was doing.’’ But it must be unique

that the right hand and left hand were in fact working on the same

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computer keyboards and at the same desks in the Department of

Interior Office. I hope we hear a better explanation today. Exhibit

5 shows the individuals, and the Xs showing that they were in fact

the same individuals involved in both aspects of this dilemma of

the inadequate lease provisions.

The Department has also testified, under oath, that nobody noticed the lack of price thresholds until early 2000. In my prepared

statement, it says ‘‘I am extremely skeptical,’’ and I would say that

I am beyond extremely skeptical, but in fact convinced that people

did notice that.

The documents suggest that someone noticed the problem and attempted to fix it, but did it wrongly. The notices of sale were different in 1998 than they were in 1999. In 1998, sales notices made

reference to 30 CFR Part 260. In 1999, somebody within the Department changed the language to refer to 30 CFR Part 203, which

contains both volume suspensions and price suspensions. However,

Part 203 applies to pre-1995 leases. Thus, the change had no effect.

The leases were operationally no different than before the change

of notice of sale. And I would call to your attention to exhibit 6 on

Part 203, where it clearly shows it was pre-November 1995 leases

that it had affected. I would ask you to also see exhibit 7, the surname sheet. This is the one that I had up earlier, and for those

who are members on the panel, take note. I have actually never

seen anything other than our founding documents that had quite

this many signatures on it. I would trust that John Hancock read

before signing. [Laughter.]

I was hoping to get at least a little reaction from that.

I am well aware that for every decision made by an agency, there

is a corresponding decision memorandum. We have asked for the

decision memoranda concerning the Department’s decision regarding the drafting of regulations, lease sales and lease approvals. We

have not received any memoranda specifically referencing the exclusion of price thresholds in the regulations, nor have we received

any memoranda regarding the decision to switch the reference in

the sale notice from Part 260 to Part 203.

Again, many people are involved at every step of the leasing and

rulemaking process. Lawyers, experts and management, at least up

to the Assistant Secretary level, are obligated to review and sign

off on every phase.

The fact that nobody raised an issue with the lack of price

thresholds for years leads to one of two conclusions: nobody reviewed the leases on either side at the Department of Interior and

these many multi-billion dollar oil companies; or everyone reviewed

and knowingly approved of faulty leases and regulations. Either

scenario is unacceptable. Exhibit 8 shows the number of people involved in the rulemaking and approval process. Now, if I have ever

seen a bureaucratic checklist of how many people have to look at

something, this is a good example. I wish we had a larger screen,

so you could read the individual names.

Our first panel of witnesses includes current and former attorneys for the Department of Interior who will help us get to the bottom of the missing price threshold. Our second panel represents

the oil and natural gas producers who have the most leases from

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1998 to 1999. And I might note, at least one of the oil companies

doesn’t have any leases in that period, but has current leases.

I realize that the companies are expected to maximize shareholder value. At the same time, shareholders expect companies to

operate on the up and up to avoid surprises that may affect earnings. I might repeat that as a board member for a public company.

At the same time, shareholders expect companies to operate on the

up and up to avoid surprises that may affect earnings.

I am sure that at least some oil and natural gas producers noticed that price thresholds were missing from the final notice of

sale and the first leases executed in 1998. They must have known

that the missing price thresholds would eventually cast doubt on

the validity of the leases. It is difficult to believe that no one

brought this to the attention of the Government.

My question to the oil companies will be this: If there is a bank

error in your favor, which you immediately notice, do you bring it

to the bank’s attention or do you take the funds and hope no one

finds the error, and instead, assemble a legal team to later claim

that the gains are yours to keep? Bear in mind that the sum we

are dealing with here has now risen to at least $10 billion, and is

in fact trust money from the people of the United States. These

royalties are collected on resources that belong to the American

people. The American people are not getting the return that Congress promised them that they would get.

I might also mention that just 2 days ago, I was watching Fox

News in the morning. They were talking about a veteran who received a $100,000 check and didn’t return it. They were talking

about him because he was in court being criminally prosecuted for

accepting and depositing a check. Even though it had his name on

it, he was knowingly accepting an amount of money that he wasn’t

entitled to. At least that is what the prosecutor said. And that happens every day in America. As a matter of fact, it is a very common

problem for veterans, that they receive an unacceptable amount,

and when it is discovered, they stop getting any payments until

they are completely made back up.

The Interior Department’s Inspector General’s office has conducted a parallel investigation surrounding the same issues. They

have conducted 27 interviews thus far of attorneys in the Solicitor’s

office and present and former MMS officials in the D.C. area and

in New Orleans. They have reviewed thousands of documents, including 5,000 e-mails and expect to conduct additional interviews.

The IG’s office expects to issue a report in 6 to 8 weeks.

I ask unanimous consent that the letter from the IG providing

the status of their investigation be inserted into the record, and

that the briefing memo prepared by the subcommittee staff be inserted into the record as well as all other relevant materials. Without objection, so ordered.

[The information referred to follows:]

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Mr. ISSA. I have one last comment before I introduce the first

panel of witnesses. It is really a public request. I would ask everyone watching or listening today, and for those reading this in print

who have any additional information regarding the missing price

thresholds in 1998 and 1999, to please contact the Government Reform Subcommittee on Energy and Resources, or its staff. I hope

that people being aware of this will help shed additional light beyond that which we will receive today.

Today our first panel consists of current and former Interior Department attorneys. They were responsible for review of the leases

and regulations, so they should be helpful in shedding light on how

these errors occurred.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Mr. ISSA. We are pleased to have here today Mr. Peter

Schaumberg, now in private practice with Beveridge Diamond, PC.

He is a graduate of George Washington University Law School, and

we appreciate your being here today. Mr. Geoffrey Heath, a graduate of the University of Michigan and George Washington University of Law, and Mr. Milo Mason, a graduate of Harvard Law

School.

Again, I would like to thank you very much for testifying here

today. I will introduce the second panel after the first panel is dismissed, and I would now yield to the ranking member, Ms. Watson,

for her opening statement.

Ms. WATSON. Thank you so much, Mr. Chairman, for today’s

hearing.

I understand that today is the second in a series of hearings on

this topic. I want to thank the past and present employees at the

Department of Interior and the oil company executives who are attending what should be an educational question and answer session. I hope we can move forward in finding positive solutions to

the oil and gas royalty programs.

The thirst for oil has placed oil and gas companies in a powerful

position. Oil and natural gas are almost like food and water to

Americans. They keep us warm in the below zero temperatures of

winter and they get us to and from work, they cook our meals and

light our homes. In short, we need it to survive. It has become one

of those commodities that we almost take for granted, until we

have to pay exorbitant sums of money for it.

The American consumer is suffering while the oil and gas industry is recording the largest profits in America’s history. This is an

unacceptable situation. I know that there is an accounting controversy surrounding the years of 1998 and 1999 that could yield

the Government an estimated $20 billion within the next 25 years

due to very expensive omissions in drafting the leases. This should

not be happening, especially in this bureaucracy.

From our last hearing on this topic, the Department of the Interior’s witness could not establish why, how or at whose direction

the language was removed from the leases. Why is there an unwillingness to allow fair and accurate exchange of numbers between oil

and gas industry and the Government? Hasn’t the manipulation at

Enron taught us anything?

Congress has a duty, we have a trust placed in us by the American people, the American taxpayer. One of those jobs is to not

allow companies to exploit, let me repeat this, this goes to the core

of my statement. One of those jobs or duties is not to allow companies to exploit public assets. The alleged theft that has occurred

during 1998 and 1999 is unacceptable and will be corrected.

With oil and natural gas prices at all time highs, companies are

expected to earn more than $65 billion royalty-free. Leases without

any royalty mechanism are driving very large revenue losses.

Americans deserve an answer to the currently inexplicable leases

issued in 1998 and 1999 that do not contain price thresholds at all.

Good public policy demands that Congress conduct real oversight,

and Mr. Chairman, that is something that the Congress has not

done in the last few years, good and effective oversight, and protect

the taxpayers’ interests.

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Now, Representative Markey introduced legislation, H.R. 4749,

to prevent any future royalty holidays for the sake of oil companies.

This legislation is designed to ensure that taxpayers receive the billions of dollars in future royalty payment they are owed by major

oil companies as payment to drill on public lands. The bill states

that if companies refuse to renegotiate such leases, they are barred

from any new oil or gas leases on Federal lands. I am interested

in hearing the Department of Interior’s and the oil and gas industry officials’ comments on this, and to make steps in the right direction.

So, Mr. Chairman, I again want to thank you for your diligence

and your leadership in bringing this issue before our subcommittee

once again. It is critical that we investigate the royalty relief mystery, particularly in 1998 and 1999, and report back to our constituents as to why this occurred. We should all, both public and

the private sector, work to provide strong leadership and advocacy

to our consumers and governmental agencies.

Thank you so much, and I will yield back my time.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. ISSA. I thank the ranking member. I would now ask unanimous consent that Mrs. Maloney of New York, who is on the full

committee but not on the subcommittee, be allowed to sit in, make

an opening statement and remain for any questions. Without objection, so ordered.

With that, Mrs. Maloney.

Mrs. MALONEY. Thank you very much to the ranking member

and chairman for holding this important hearing on deep water

leases entered into between the Department of Interior and various

oil and gas companies. It is absolutely indisputable that the American taxpayer is losing billions of dollars from oil and gas extracted

from federally owned land—land that is owned by the citizens of

this country. I think by all accounts, it is terribly, terribly unfair.

The Government Accountability Office estimates that because the

price thresholds were not included in the deep water leases from

1998 to 1999, the Government will lose approximately $10 billion

in revenue. The GAO further estimates that the Government could

lose as much as $60 billion over the next 25 years if the KerrMcGee Corp. wins its lawsuit challenging the price threshold set on

its leases from 1996, 1997, and 2000.

I hope we will learn today how those contracts entered into in

1998 and 1999 failed to include price thresholds. What we have before us today is the Interior Department’s Enron. How could you

make such an incredibly large mistake? And even though the chairman pointed out that numerous people signed the contract, the

lease, obviously the system is broken.

In Enron, we changed the law so that the CEO of the company

has to sign and say, ‘‘yes, I understand the financial obligations of

my company.’’ Maybe we need to change the law so that the Secretary of the Interior has to sign and say, ‘‘I understand that these

leases are fair.’’ Maybe we have to move it to OMB. Maybe we have

to have a private contractor come in and look at it. But we cannot

tolerate this type of, I would say abuse, to the American taxpayer

on oil and gas that is owned by the American people.

And I would say that Director Burton has written a letter and

asked companies to renegotiate voluntarily the leases that do not

include price thresholds. I think that is a good direction to go into,

that is, it is clearly unfair. I would like to join my colleagues here

on the panel in a bipartisan letter, which we hope every Member

of Congress would sign, asking the oil companies to renegotiate

this unfair lease. I just happened to look at the testimony today of

Shell Corp.

In any event, it is obvious that this is an unfair lease, given the

commodities market for oil now. And if both parties would renegotiate, and they say they are willing to do so, they say that they are

willing to make a change in our 1998 and 1999 leases by considering the addition of price thresholds, I think that is the right direction to go in. I think we should advertise to the American people

which oil companies are being fair to the American people. Maybe

we can take out public service announcements.

But I truly believe that every oil company should stand up and

do what’s right and renegotiate their leases. I join my colleague,

Ms. Watson, in being a co-sponsor of H.R. 4749, the Royalty Relief

for Americans Consumer Act, which would force MMS to renegoVerDate 11-MAY-2000 13:00 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\33391.TXT HGOVREF1 PsN: HGOVREF1
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tiate and bar companies who would not renegotiate from any further leases.

I would also like to hear today from the Department of the Interior on another point, what plans they have to ensure that States

have the necessary funding to conduct audits on leases. An amendment that I passed on the Interior Appropriations bill recently directed $1 million of the overall appropriation for the MMS to

States and tribes for auditing purposes. For several years, the total

funding that the MMS has provided for audit funds was held static

at about $9 million, with no increase for inflation.

In fiscal year 2005, MMS began cutting allocations to some

States and tribes, while reallocating funds. The Department of Interior should be working to improve its auditing programs and I

hope to hear what steps are being taken in that direction and also

to make sure that you understand what is in your leases.

I would also be very interested in hearing from energy companies. I hope that we will hear today that all of them are willing

to go and renegotiate their leases. But I also would like to hear

why they are reporting one price per barrel to their shareholders,

while reporting a separate price to the Federal Government, from

the oil they pay to the Federal Government in royalties to what

they trade with other companies and report to their shareholders.

And I would like for them to explain why they did not use the same

set of numbers in both cases.

I just want to end that, in a time when the average price of gas is $3, in some places it is higher, and we are regrettably and painfully having to cut student aid for college loans, senior aid, and programs for the poor. We need to really handle the management of

Government better. And to lose $10 billion, because the lease was

not appropriately signed and reviewed, is a national disgrace. It is

a scandal, it is a scandal, it is an absolute scandal. I would call it

the Department of Interior’s Enron. And we need to understand

how this happened and how we can make sure it does not happen

in the future.

Thank you.

[The prepared statement of Hon. Carolyn B. Maloney follows:]

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Mr. ISSA. Thank you. I would now ask unanimous consent that

all opening statements be placed in the record. Without objection,

so ordered.

Before I swear in the first panel, I would like to set a tone for

today, and that is that we deliberately had our Department of Interior panel first, so we could establish contract activities. Obviously,

when we get to the oil companies, we may very well be getting into

contract sanctity versus intent of Congress. But on the first panel,

the primary concern is intended to be, although Members are free

to ask any questions they want, how did we make so many different changes in a contract, how did we have defective contracts,

at least from this position, with so many people signing off on

them.

With that, I would ask the first panel to rise, and as is a requirement of this committee, to take the oath.

[Witnesses sworn.]

Mr. ISSA. The clerk will take note that all witnesses affirmed.

Please have a seat.

Did you bring any people with you that may be consulting or providing you additional information during your testimony and question and answer period? If there is anyone that is going to be providing assistance to those testifying, I apologize, but would you

please rise and also please take the oath. Now I see none. So it will

be just the three.

We have previously introduced the panel, so we will begin with

Mr. Schaumberg and Mr. Heath and then Mr. Mason. Again, your

statements are in the record, so you may use your 5 minutes over

and above your opening statements.

STATEMENTS OF PETER J. SCHAUMBERG, ATTORNEY,

BEVERIDGE AND DIAMOND, PC; GEOFFREY HEATH, ATTORNEY, U.S. DEPARTMENT OF INTERIOR; AND MILO C. MASON,

ATTORNEY, U.S. DEPARTMENT OF INTERIOR

STATEMENT OF PETER SCHAUMBERG

Mr. SCHAUMBERG. Thank you, Mr. Chairman. I did provide my

biography in my opening statement, but if I may just briefly summarize, as you correctly noted, I am currently of counsel with the

law firm here in Washington of Beveridge and Diamond, PC. I retired from the Office of the Solicitor on May 30th of this year, after

almost 31 years of Government service, the last 25 of which were

with the Office of the Solicitor.

With respect to the time period that we are dealing with here,

I held two positions. I was the Assistant Solicitor for onshore minerals, responsible for managing a branch of approximately nine attorneys that provided legal advice to the Bureau of Land Management on its onshore minerals issues involving oil and gas, coal,

other solid minerals under the Mining Law of 1872.

Since 1997, approximately October, November 1997, I also was

the Deputy Associate Solicitor for the Division of Mineral Resources, which included my branch of onshore minerals, as well as

the branches of Royalty and Offshore Minerals, and the Branch of

Surface Mining. So I held a dual responsibility.

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Between 1995 and 1997, in that 2 year period, in 1995 the Solicitor’s Office was reorganized, to create a new Division of Mineral

Resources. At the time I was appointed as the Acting Deputy Associate Solicitor, and in the 4-years before that, I had been the Assistant Solicitor for Royalty, where I dealt with royalty determination and collection issues, not with leasing issues. But from 1995

to 1997, the branches of Royalty and Offshore Minerals were consolidated into one branch under my supervision.

And then as I said, prior to 1995, for that 14 years, I worked almost exclusively with the Royalty Collection Program in the Minerals Management Service.

I would be happy to answer any questions that you or any of the

other Members may have today.

[The prepared statement of Mr. Schaumberg follows:]

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Mr. ISSA. Thank you. Mr. Heath.

STATEMENT OF GEOFFREY HEATH

Mr. HEATH. Thank you, Mr. Chairman.

I had joined the Solicitor’s Office in what was then the Division

of Energy and Resources in November 1983. Since that time, as a

staff and then later in supervisory positions, I have represented the

Minerals Management Services Royalty Management Program, as

it was called most of the time, now known as the Minerals Revenue

Management. The Minerals Revenue Management was responsible

for the collecting, accounting for a disbursing of the royalties, rentals, bonus payments and other revenues derived from more than

26,000 oil and gas and other mineral leases on Federal and Indian

lands, including the outer continental shelf, and enforcing the lessees’ royalty obligations.

In October 1997, in connection with changes in the management

assignments with in the Division of Mineral Resources, I became

the Acting Assistant Solicitor for Royalty and Offshore Minerals.

As supervisor of the branch of Royalty and Offshore Minerals, I

gained my first responsibility for and involvement in the offshore

leasing process. Before that time, I had not done significant work

with the Offshore Minerals Management Program, and that was

not part of my responsibility.

As the Acting Assistant Solicitor and then later the Assistant Solicitor, since July 1998, I represented both the Royalty Management Program and the Offshore Minerals Management Program,

and supervised the other staff attorneys within the branch representing those programs. On May 15th of this year, in connection

with a reorganization of the Division, I was designated as Assistant

Solicitor for Federal and Indian Royalty, and consequently do not

any longer have responsibilities with respect to the Offshore Minerals Management Program, except for matters involving financial

related issues.

I have no substantive prepared statement, and would be happy

to answer any questions that the members of the committee may

have.

[The prepared statement of Mr. Heath follows:]

35

36

Mr. ISSA. Thank you. Mr. Mason.

STATEMENT OF MILO C. MASON

Mr. MASON. Thank you, Mr. Chairman.

I don’t have anything to add to my biographical statement, really, other than I was a senior career staff attorney working on these

matters at the time.

[The prepared statement of Mr. Mason follows:]

37

38

Mr. ISSA. OK, then we will begin a round of questioning. And I

will note on exhibit 5, Mr. Schaumberg and Mr. Mason, both are

listed as being involved in both the sale of documents and in the

rulemaking involved before us today. Mr. Heath, I show you as involved only in the sales, in other words, signing off on them. My

opening question really is to all three of you, but particularly to the

two that were involved in both sides.

Were you aware of the ambiguity, and if so when, between what

the rules were saying and what the contract was saying in these

various periods of time in which you signed the leases?

Mr. MASON. May I go first on this?

Mr. ISSA. I think they’ll let you go first on each one if you would

like. [Laughter.]

Mr. MASON. Thank you, Mr. Chairman. Maybe I shouldn’t.

I did not sign the leases. I did not sign off on the actual lease

document. I did review and sign off as legally sufficient were the

proposed and final regulations on royalty relief during that time,

and also on what we call the proposed notice of sale, which is basically, a lease sale announcement. The final notice of sale, which is

again the final announcement of the auction or lease that we would

hold in New Orleans, 30 days after, has to be 30 days before the

actual bid opening and auction.

The leases were issued, and I always assumed they were more

of a clerical duty for the regional director’s office to issue after the

lease bids were reviewed for adequacy, and then the lease documents themselves would be sent to the winning, highest bidder on

the block where the highest bidder would sign and return the lease

to the regional director because they would want it, and they had

to present it in an adequate bid, which under the statute requires

fair value for that tract. Then the regional director would sign off

on that.

I never saw those leases until having to review them before we

presented them to the committee upon your request. It was

brought to my attention some time in 1999 that the lease addendum that I had thought had been a part of those standard lease

forms that were sent out, I would say clerically, had been sent out

without the lease addendum for the years 1998 and 1999. I was not

aware of that until a telephone call, and I racked my brain from

whom it came, but I was surprised.

Mr. ISSA. OK. Following up on that, so it is your understanding

that a lease document, the actual, signed document by the regional

director, is pro forma, that in fact it is to mirror the sales document

and notice of final sale, such that in fact everybody understands

that when they get that lease, that is just something that comes

in later on that says, oh, by the way, we are done with this, go out

and drill, and that in fact, what the lease is going to mean is already determined before that document goes out, that is why you

are calling it clerical, as I understand it?

Mr. MASON. Yes.

Mr. ISSA. OK, and last question, then I will ask the others to answer substantially the same three questions—go ahead.

Mr. MASON. I am sorry, Mr. Chairman, I guess I should qualify

that yes. Not every aspect of the standard lease form needs to be

in the notice of sale. They become the standard lease form. They

39

have been reviewed at some point. I think I did review the earlier

language that had been the addendum and the lease form that

were the new deep water royalty lease forms in 1996, when they

were first issued. I don’t think I needed to sign off on them, I just

read them and they looked fine and they reflected the policy

choices of my client. And my signature, or surname, was for their

legal sufficiency.

Mr. ISSA. Thank you for that. Then what you are saying, though,

is that ultimately the regional director doesn’t have the authority

to make up new terms and conditions, that the lease has to be substantially the same as the terms and conditions that were part of

the bidding process notice of sale?

Mr. MASON. Yes. I don’t think the lease terms and conditions

were delegated to the regional director. They are signed off on in

the lease announcement. What was understood to be the conditions

and terms of the leases were signed off on at I think the Assistant

Secretary’s level.

Mr. ISSA. OK, so assuming for a moment that the lease, although

in most people’s minds it is a binding contract, it is the deal, but

in the business of Government contracting or Government bidding,

in this case, realistically, the parties often don’t rely on that, because they rely on all the terms and conditions in the bidding process, all the information there. And this document is to reflect that.

If that is the case, then from the documents sans the lease agreement, did you believe that there were thresholds in the notice of

sale and the documents that were under your control, that during

the entire period from the time Congress acted, that there would

be a threshold, both for price and volume in leases that were

signed?

Mr. MASON. That is a very good question and a very complicated

question. I would like to answer in a couple of sections.

Mr. ISSA. Absolutely.

Mr. MASON. Certainly, Congress in the Deep Water Royalty Relief Act mandated the volume suspensions, for a period of 5 years.

While we had issued regulations limiting that volume to the fields

or development projects, those regulations were struck down in a

case usually referred to as the Santa Fe Snyder case. The Fifth

Circuit decided that ‘‘the leases’’ meant each and every lease, and

it was mandated.

Those regulations, I am at this point, 10 years later, I am not

exactly sure whether they, in the interim final rules, contained

price thresholds or not. I was at the time asked about the authority

to put price thresholds into new leases. I am authorized by Interior

to waive some of those attorney-client privileged discussions that I

had back then.

Mr. ISSA. Thank you.

Mr. MASON. So I am explaining this to you now with a little bit

of hesitation, because I don’t reveal attorney-client privileged discussions usually.

I rendered a professional judgment that for those 5 years, the

Secretary had authority to impose price thresholds, although they

were not mandated by Congress. So they were not, since they were

not mandated, I mentioned orally, because most of my legal advice

is oral, that they didn’t need to be necessarily in the regulations.

40

They could be in a lease sale announcement or the lease form on

a case by case, lease sale by lease sale basis.

Especially if they are going to be just for 5 years, or the client

had the choice of putting those price thresholds in the announced,

in the lease sale announcement or the leases. They chose, I

thought, to do that, as a policy choice back in 1996. And until the

telephone call in 1999, when I was informed that the lease addendum didn’t have those things in them, I assumed the client was

putting them in.

Mr. ISSA. OK. As I go to everyone else, I will just recap what I

believe I heard, one, that you believe that there was authority, both

from the Congress, both for price and volume thresholds, that volume thresholds were clear and explicit from Congress, although interpreted by the Fifth Circuit, and thus that is now law that it is

by lease. But that in fact price thresholds, although not mandated,

were within the authority and you believed that they were in fact

being put in until 1999?

Mr. MASON. Yes.

Mr. ISSA. Excellent. I guess now you know why you don’t want

to be first. [Laughter.]

Whoever would like to be second, it is not nearly as tough a position.

Mr. SCHAUMBERG. I would be happy to go second, Mr. Chairman.

Mr. ISSA. Mr. Schaumberg.

Mr. SCHAUMBERG. Would you be kind enough to repeat the question for me, though? It has been a while since I heard it.

Mr. ISSA. Realistically, this is the classic, what did you know and

when did you know it. What was your understanding at the time

that you were involved, and in your case, you were involved in both

the rulemaking and in the lease, or if you will, the sale portion. So

you were aware of what we were telling the industry to bid on, and

you were aware of the regulations.

So, very similar to Mr. Mason, what were your understandings

of what Congress wanted done, and what was your belief of what

was being done? I won’t hold you to Mr. Mason’s statements about

leases being, if you will, somewhat pro forma or clerical, and in an

expectation that it was in the lease and that there was nothing

new in the lease that wasn’t understood by the bidders earlier. But

if you could comment on that along the way.

Mr. SCHAUMBERG. Well, let me first deal with the regulations. As

Mr. Mason explained, the price thresholds for these lease sales was

not a statutory requirement. Therefore, the decision whether to put

the price thresholds in the regulations was a program decision. It

was 8 or 10 years ago that we worked on these regulations.

I don’t remember how extensive my involvement was in the

drafting and preparation of those regulations. Because it was a program decision, I think it would be best to ask the program what

their reason was as to why they decided not to put them in the regulations.

Mr. ISSA. As you are answering that, if you could clarify what a

program decision means for the panel.

Mr. SCHAUMBERG. A decision of the Minerals Management Service that was not a legal decision of the Solicitor’s office, as to

whether to include the price thresholds as a regulatory provision.

41

As far as the lease sale documents, you have included as an exhibit the first page of a memorandum to the Assistant Secretary.

The lease sale packages that came through for review and surname

literally were close to a foot tall in terms of the documents that

were included in those packages. Usually the top document was

this memorandum to the Assistant Secretary that contained the director’s recommendations as to what the terms of the sale ought to

be.

I don’t recall what level of review I provided for these various

packages. I can tell you with some fair recollection that my review

was pretty much an executive level review that I was reviewing,

as the Deputy Associate Solicitor. I had other responsibilities in

terms of my branch responsibilities, but I did have management responsibility for the division. I relied upon Mr. Mason’s review and

Mr. Heath’s review before I looked at those packages. And Mr.

Mason would have items, if there was something that he caught.

I generally would at least look through the memorandum to the

Assistant Secretary, because that would highlight any changes or

new terms that were being included in the leases. I don’t know that

I did it here, but that was more or less my practice.

So I don’t recall knowing that there were not price thresholds in

these leases until approximately a year and a half ago, when prices

ran up and the Minerals Management Service was then looking at

issuing letters or orders to the companies advising them that the

price thresholds were exceeded. Therefore there was some discussion as to what form those orders ought to take. I think that was

the first time I learned that there were not price thresholds in the

leases for these 2 years. That is my best recollection.

Mr. ISSA. You get to do cleanup on this.

Mr. HEATH. I don’t know that I have much to clean up, Mr.

Chairman.

As was the case with Mr. Schaumberg, I did not know that price

thresholds were not included in the 1998 to 1999 leases until some

time after, or in connection with the Santa Fe Snyder court decisions. My first involvement in review of any of the lease sale packages was of the first of the sales held in 1998. Before then, I did

not have either personal or management responsibility for any part

of the lease sale process. My review likewise was of a quite high

end, summary level.

Necessarily, my initial reliance is on someone who has a lot

greater years and depth of expertise than I did. I don’t recall any

discussion or mention of price thresholds or existence, lack of existence or anything from that time. It isn’t anything that I would

have been looking for. I had not seen a lease sale package with the

price thresholds in them before reviewing the 1998 and 1999 packages. It is not something that would have caught my attention, and

it came to my awareness later.

Mr. ISSA. OK. I am going to do a similar recap with the second

to panelists, and then because it is unfair for me to go on forever,

I will allow the ranking member equal time here. If I understand

now better than I did before, these signatures, and particularly the

three of you on this exhibit 7, Mr. Mason, I realize it was the first

part of the year, so January 28, 1998 was actually January 28,

1999, I believe, since the document is February 9, 1999 date

42

stamped, on exhibit 7. For Mr. Heath, I noticed that you wrote

1998, but then corrected it.

I also noticed that next to your name, there are some other,

smaller initials on this document. Would that indicate that maybe

it was staff signed? You initialed, and then signed for you?

Mr. HEATH. No, Mr. Chairman. The other letters are SOL/ROM,

meaning Solicitor/Royalty and Offshore Minerals.

Mr. ISSA. OK, so that is a title that you included. Thank you.

And you apparently put 1998 and then realized it was 1999 and

changed it.

Mr. HEATH. Yes, sir.

Mr. ISSA. Which we all do in January every year, I am afraid.

Obviously, I am assuming, Mr. Schaumberg, you got it last, because you got 1999 right off the bat.

Mr. SCHAUMBERG. Mr. Chairman, I was not last. Kay Henry, who

was the Associate Solicitor, was last. But I did get the date right.

Mr. ISSA. You are only the last in the box, but you are right. OK,

so the fact that they are all signed on the same day to me begins

to indicate, as you said, Mr. Schaumberg, that Mr. Mason did the

functional work, went through the 2 feet of documents, and then

each of you would then initial off, simply saying ‘‘it was passed before me, perhaps I flipped through the top of the memo,’’ but in

fact, you did not go through a foot of documents. This doesn’t indicate that kind of check and balance. Would that be fair for each

of your statements, that your level of review is not a lawyer getting

ready to go to court, it is simply ‘‘yes, I understand this one is

going out, and it has been checked by the primary person to check

it,’’ which would be Mr. Mason?

Mr. SCHAUMBERG. For me, that is correct, Mr. Chairman.

Mr. HEATH. Yes, that is a fair characterization, Mr. Chairman.

I did not go through the foot of documents.

Mr. ISSA. Good. To be honest, that is helping us in seeing so

many signatures and understanding why it might not mean anything.

Last but not least, apparently in 1999, Mr. Mason, you became

aware from that phone call of the lack of price thresholds. My understanding from the second two testimonies is that was not passed

on at that time in some formal way or in a memo of some sort to

Mr. Schaumberg or Mr. Heath. I will include that in a question to

all of you as my final, here. Was there a memo or anything tangible or anything in your recollection where you were told about

this 1999 discovery, for any of you, or Mr. Mason, did you tell any

of them or send them a memo?

Mr. MASON. I did not send them a memo, to my recollection. I

did, I recall, mention it to Geoff. I don’t know if I mentioned it to

Peter. As I report to various other lawyers, and the management

lawyers in the office, it may have been one of several things I discussed with them that day. Also, I said I was looking into what to

do to fix it, because I know I was asked about that. I am pretty

sure I said on the phone, ‘‘well, let’s get the addendum back in

there.’’ I don’t know what else. But that is my recollection.

Mr. ISSA. OK. I guess Mr. Heath, you remember that conversation?

43

Mr. HEATH. Truthfully, I don’t, Your Honor, but I am not questioning that it took place. If Milo remembers it, I am sure it took

place, but I don’t remember it. I don’t question it, either.

Mr. MASON. May I say one thing?

Mr. ISSA. Of course.

Mr. MASON. Back then, the price of oil had, I wouldn’t say flatlined, but it had been pretty low for a long, long time.

Mr. ISSA. For this panel, those were the good old days.

Mr. MASON. It didn’t seem like as big a deal as it is now, for

sure, at that time. Because we assumed the prices would continue

on that——

Mr. ISSA. You were dealing with sort of like a lease option. If you

don’t expect to renew the lease, it isn’t a factor until you start getting to the end of the lease, so to speak.

OK, I appreciate I have taken a lot of time. Ms. Watson, your

questions.

Ms. WATSON. Thank you, Mr. Chairman. Congressman Markey

and several others recently introduced a bill to correct the royalty

problem. The bill would suspend royalty relief when oil and natural

gas prices exceeded a threshold price of $34.71 per barrel of oil, or

$4.34 per 1,000 cubic feet of natural gas. With respect to existing

leases, the bill would require that Mineral Management [MMS], to

renegotiate the leases to include these price thresholds.

Any company that refused to renegotiate an existing lease would

not be eligible for any new leases for oil or natural gas on Federal

lands. Now, what would be your thoughts about this? I heard a distinction made between solicitors and programmatic personnel. Is

this something that would go to the program personnel or the solicitors? And I would like each one of you to respond.

Mr. MASON. Thank you. I am the lead-off, I guess, again.

Mr. ISSA. I guess you get to be the first pitcher for the whole

time. [Laughter.]

Mr. MASON. Let me take a pass at commenting on that, because

I am not in a position to represent the Department on future legislation.

Ms. WATSON. Yield for a minute. Let me just get a clarification

in my own mind, and for the panel. There is a difference between

the program administrators, and those are the other people, and

you, the solicitors, right?

Mr. MASON. Yes.

Ms. WATSON. And you are talking about the attorneys who then

go over and do a perfunctory review, is that correct?

Mr. MASON. Yes, I sometimes don’t want to do just a perfunctory

review, but yes.

Ms. WATSON. Well, you go a little bit below the surface?

Mr. MASON. Right. My review is to render my professional judgment about what is legal and what isn’t sufficiently legal.

Ms. WATSON. Exactly. That is what we are looking for.

Mr. MASON. And the program people are policy people, the Assistant Secretary or the Director of MMS. And they choose whether

to put price thresholds in or not, and whether to support legislation

or not. At the time, I get sometimes a review of proposed legislation, I will render a legal opinion about whether it is constitutional,

44

what the policy implications would be. I don’t usually render a personal opinion about legislation that is pending before Congress.

Ms. WATSON. All right. Mr. Schaumberg.

Mr. SCHAUMBERG. As I explained, I am no longer with the Department. At the time I was there——

Ms. WATSON. How does it sound to you? Such a piece of legislation, how would it sound to you if you were in the Department

still?

Mr. SCHAUMBERG. Well, we had some discussion about that while

I was at the Department. And the privilege waiver from the Solicitor does not go to those matters. So that would be a privileged communication. So I believe at this point, without having a waiver on

that matter from the Solicitor, it would not be appropriate for me

to answer as to what my opinion was.

Ms. WATSON. All right. Mr. Heath, what do you think?

Mr. HEATH. Congresswoman, I would like to reinforce something

that Mr. Mason referred to. Our understanding is that we were

being called in our personal capacity, and not as representatives of

the Department. We don’t have authority to speak for the Department.

Ms. WATSON. OK. Mr. Chairman, you know, there is a piece

missing in all of this. We have the attorneys here, some active and

participating now. And we have the companies that would be affected by policy. But we don’t have the programmatic side to explain some of this.

Mr. ISSA. Will the gentlelady yield? That is the reason that undoubtedly we will have another hearing.

Ms. WATSON. Exactly. I am just pointing out, we can’t get any

real substantive feedback from this panel, because they are the

guys that come in and see if what we propose is constitutional or

not, and they advise the programmatic people. They don’t come up

with the ideas.

So what I would like to hear from in our next hearing are the

people that devise the programs. Because I had a question here as

to why MMS cut the number of auditors. Well, they can’t answer

that. The programmatic side can.

Mr. ISSA. Sure. I would look forward to another hearing.

Ms. WATSON. Yes.

Mr. ISSA. If the gentlelady would yield, perhaps I could take care

of the impasse here.

Ms. WATSON. Sure. Let me just conclude by saying that I can’t

put these people on the spot, because they don’t have the answers

to what I really want to know: how do these things happen. They

do the oversight. They do the legal interpretation of the policies

that come from the administration of the program.

So I am not really blaming them for not having the information,

I understand. We just don’t have that piece. I look forward to our

next hearing.

So I don’t have any more questions, because they truly can’t respond to my concerns.

Mr. ISSA. OK. Thank you. What I would ask, would all the witnesses, subject to Department of Interior waiving the specific attorney-client privilege for the question you were unable to answer, be

willing to answer them once that waiver is granted in writing, so

45

that we do not have to get you back? Would that be acceptable,

rather than having you all come back, if that is granted?

Mr. HEATH. From my perspective, Mr. Chairman, that would be

fine.

Mr. ISSA. All I need is a yes, and then we will submit to the Department of Interior, should they grant that, then the question

could be answered in writing. We wouldn’t trouble you to come

back, if at all possible.

Mr. SCHAUMBERG. Well, Mr. Chairman, it is certainly a complicated question.

Mr. ISSA. We would submit the question in writing to you again

anew. I wouldn’t ask you to try to answer later what you heard

here today. It would come to you in writing.

Mr. SCHAUMBERG. I understand. I am just suggesting that a response to a question such as that, it is probably a very large and

complicated constitutional legal question that would not be easy to

respond to.

Mr. ISSA. Is the gentlelady interested in the Cliff Notes or the

long answer? [Laughter.]

Ms. WATSON. Mr. Chairman, my true opinion, this is kind of a

waste of time, because these are not the guys who initiate the policy.

Mr. ISSA. Then the gentlelady withdraws that. I will save you

that. With that, I have just one final closing question, and it will

be very brief.

Mr. Mason, you had said in the first round that in fact you didn’t

believe that the price thresholds should be put into the regulations,

but rather, they should be in the lease agreements and that you

understood it was a policy decision in what was then the Clinton

administration, but in fact you didn’t believe it should be in the

regulations. Is that correct? Did we hear you right?

Mr. MASON. I don’t think I said I preferred one way or the other.

The lease terms and conditions can be set forth in the proposed announcement of the lease sale, and the final notice of sale. They

don’t have to be in the regulations to be part of the lease. When

I was asked my professional opinion of which way to go, I am not

sure what I answered, but I must have said it would be fine to do

it on a lease sale by lease sale basis. They could be more flexible

that way, than have it codified in the CFR. If they did codify it in

the CFR, the actual number of what the price threshold, since the

statute grants the Secretary the discretion on the price of production, they could choose a different price production than the one

that was originally set for old leases.

Mr. ISSA. OK. So if I understand correctly, you were the person

that this decision process—does it go, or doesn’t it go into the regulations—came to, in all likelihood. You believe that you issued an

opinion that it could be done either way, and that in fact that led

to it not being in the regulations itself, thus allowing for it to either

be or not be in individual leases later granted at individual threshold amounts that were not determined by the regulation.

Mr. MASON. That is a complex question, too.

Mr. ISSA. Actually I was putting words in your mouth. [Laughter.]

46

Mr. MASON. I wasn’t going to say that, Mr. Chairman. I am

sorry.

Actually, Congress was the first that chose to let the Secretary

decide when or if and how he or she would put in the price thresholds for these lease sales. It wasn’t me.

Mr. ISSA. I understand. You are in that wonderful position that

you have to interpret what 435 people in one side of the house and

100 people in the other might have meant.

Mr. MASON. And then get the Fifth Circuit to tell me what they

truly meant. [Laughter.]

Sometimes, yes. So I just rendered a legal opinion that whether

it was sufficient or OK to put them in the lease forms or the sale

notices or the CFR.

Mr. ISSA. I would assume, as my opening statement said, that

there were memoranda, there was some kind of correspondence,

written documents that went with these decision, thought process,

discussions.

Mr. MASON. Not usually. My legal practice is a lot of just oral

correspondence on the telephone and in meetings that were deciding 18 issues, maybe, and they would say, well, can we do it this

way, and I would say——

Mr. ISSA. OK. So my frustration in my opening comment that we

have received no memoranda is because the departments operate

basically orally and without memoranda, that is why we haven’t

gotten any correspondence back and forth?

Mr. MASON. Well, we are a couple of floors away from each other,

and a lot of the day to day, at the time, I don’t know if it seemed

especially crucial. I don’t know. I don’t usually write a solicitor’s

opinion on matters like this, or put memos to the record.

Mr. ISSA. How about e-mails? I guess I will ask one closing question related to this particular subject. I am from an era before emails. In my previous Government time, I was in the military, in

the 1970’s. We used to call it CYA. We never knew what it meant,

but we had an idea. [Laughter.]

I can’t imagine, as a young second lieutenant, not annotating in

my little green book—that you got when you got your butter bars—

things that I was told, so that I would have them at the time as

I remembered them. I can’t imagine anything significant in the

thousands of dollars that something wasn’t produced on a standard

blank form with a number on it that was put in the record or submitted to whoever was appropriate, just to confirm what I had been

told. If it was so much as a vehicle leaving the base, which was

an unusual event, potentially, there was a piece of paper. So on $10 billion, and maybe it didn’t seem like it was going to be $10 billion, are you saying that assuming the privilege is

waived, we will find no correspondence between various people that

was done in writing, including e-mail?

Mr. MASON. No, I am not saying that, Mr. Chairman. I don’t recall putting any legal opinion in writing at the time. I may have

referred to something in e-mails. The Solicitor’s office no longer has

e-mail, since the Cobell case.

I am not positive that there won’t be something. But probably

not from me. And quite frankly, you are right, often memos to the

file are done. For the first 15 years of my Federal career, I kept

47

my own chron file in my drawer of things I had written myself. The

drawer got full and I quit doing that, because I don’t have enough

time to chronicle every opinion I render orally and in different

meetings and back to back things. Maybe I should start doing that

more often now.

Mr. ISSA. Well, I will tell you, I have five drawers of my chron

file. I probably couldn’t find things in there unless I knew the date,

but my assistant would never let me get rid of it.

How about for the other two? Do you know of any memos from

your recollection, including e-mail type memos, that you did that

we should expect to see coming in time?

Mr. HEATH. Not to my knowledge, Congressman. Our daily practice, just to clarify a little bit, when we give informal advice on

these sorts of questions, certainly if a client agency wants a written

opinion, then we will give it to them. Back in the era when we did

have e-mail, before we were cutoff, sometimes I would say, can you

send me a confirmatory e-mail, that would be fine.

But a lot of times we will simply get informal inquiries if it is

OK to X or Y. And we will answer those inquiries, but that frequently does not yield written correspondence. I don’t know of any

on this subject.

Mr. ISSA. OK. I will close with one last question, and Mr. Mason,

you get the first and the last in this case. Looking back, had you

made a different decision, one in which you said that price thresholds at a fixed amount should have been put in the regulation

when you made your original decision, had that gone in the regulation at $28.50 and $3.50, do you believe we would be here today?

Mr. MASON. I don’t think so. No.

Mr. ISSA. I will take that as a no.

Thank you very much. I appreciate your being here. With that,

the first panel is dismissed. We are going to take a 5-minute break

and give the second panel a chance to get seated and set up. Thank

you.

[Recess.]

Mr. ISSA. This subcommittee will come back to order. Thank you

very much.

Before we begin, I want to again bring everyone’s attention to

the first panel, which I think was illustrative of what I think this

subcommittee is looking for. In the first panel, we were trying to

determine who made a decision to have so many different contracts, how a mistake would happen where, with one intent of Congress we had multiple different documents, multiple different rule

processes that led to an ambiguity that has both companies in

court today. Obviously the Federal Government looking for royalty

income that was forecasted but not received.

Our second panel today, which I am about to introduce, represents, to be honest, the finest brain trust that exists in oil companies doing business in America today. I am confident that when it

comes to understanding how to find oil and natural gas, we

couldn’t have a better selection. More importantly, when it comes

to understanding how this failure affected your companies, how we

should correct it, how you forecast your own earnings and obligations to the Federal Government, and so we will begin looking at

that. Although the first panel was about the agency that we hold

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responsible for the errors, we need your help, from the private sector, in preventing this from happening again. Understanding how

it affects your company, and perhaps in how we can together get

out of this in a legal and constitutional fashion, would be most appreciated.

Our second panel today of witnesses includes John Hofmeister,

president of U.S. operations, Shell Corp.; Randy Limbacher, executive vice president, exploration and production-Americas,

ConocoPhillips; Mr. Tim Cejka, president of Exxon Exploration Co.,

ExxonMobil Corp.; Mr. Paul Siegele, vice president for deep water

development, Gulf of Mexico, Chevron Corp.; and Mr. Greg Pilcher,

senior vice president, general counsel and secretary of Kerr-McGee

Oil Corp.

Since I didn’t do it the first time, I want to make sure I get this

right. If I could ask everyone that is testifying and anyone who

may give advice or counsel to those testifying to rise and take the

oath.

[Witnesses sworn.]

Mr. ISSA. The clerk will please note that all witnesses and gentlemen behind answered in the affirmative.

Again, we previously have unanimous consent that all your opening statements be placed in the record. I want to thank everyone

for rushing, in some cases at the last minute, to get us a good opening statement. Those will already be in the record. You need not

re-read them, although you are certainly welcome to. I would ask

that you stay within 5 minutes. The first panel shocked me by

staying within 1 minute.

And with that, we are going to waive opening statements on this

side and go to Mr. Hofmeister.

STATEMENTS OF JOHN HOFMEISTER, PRESIDENT OF U.S. OPERATIONS, SHELL OIL CORP.; RANDY LIMBACHER, EXECUTIVE VICE PRESIDENT, EXPLORATION AND PRODUCTIONAMERICAS, CONOCOPHILLIPS CO.; A. TIM CEJKA, PRESIDENT, EXXON EXPLORATION CO., EXXONMOBIL CORP.;

GREGORY F. PILCHER, SENIOR VICE PRESIDENT, GENERAL

COUNSEL AND SECRETARY, KERR-MCGEE OIL CORP.; AND

PAUL K. SIEGELE, VICE PRESIDENT FOR DEEP WATER DEVELOPMENT, GULF OF MEXICO, CHEVRON CORP.

STATEMENT OF JOHN HOFMEISTER

Mr. HOFMEISTER. Good morning. My name is John Hofmeister.

I am the president of Shell Oil Co., the U.S. arm of Royal Dutch

Shell.

Shell is an integrated oil and gas company that is dedicated to

meeting the challenge of growing world demand for energy efficiently, profitably and responsibly. Shell puts sustainability, the

search for viable new energy sources and the application of innovative technologies at the heart of how we do business. We are dedicated to growing the North American energy supply.

Our commitment is underpinned by a history of investing billions

of dollars every year in the development of future domestic energy

sources and defining new frontiers. Shell is pleased to testify before

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the subcommittee today regarding price thresholds and deep water

leases.

Since its inception in the middle 1990’s, Shell has been a proponent of the Deep Water Royalty Relief Act as a way to encourage

investment in the emerging deep water Gulf of Mexico. The Deep

Water Royalty Relief Act provided a great benefit to the Nation by

encouraging the development and exploration of oil and gas leases

by making them more economically attractive.

It was enacted at a time when the uncertainty of the technology

and the size of the capital investment required huge corporate commitments to make these leases successful and productive. For example, even in the 1990’s, the exploration and development of

these leases required a billion dollar plus investment. A single exploratory well, not necessarily productive, involved costs in the $50

million range. This incentive was successful in attracting capital to

the development of this important source of domestic energy.

Shell is a proponent of price thresholds on deep water royalty relief. We supported price thresholds on relief when the act was

being drafted, and continue to support them today. Shell does not

believe deep water royalty relief is necessary in the current commodity price environment. However, if prices fall, the economics of

deep water projects would change and deep water royalty relief

might be necessary again to encourage leasing in the deep water.

Outer continental shelf leases are not negotiated by lessees. Minerals Management Services drafts and publishes a standardized

lease form to be used in the outer continental shelf. A lessee must

either accept the lease as drafted or forfeit the lease and deposit.

Therefore, when leases are awarded, the lessee must execute the

lease and return it within the time specified. There is no negotiation, but only an award of a lease to the highest qualified bidder.

Shell’s policy is to pay royalties due by lease and by regulation.

Shell does not contest the implication of price thresholds to deep

water leases. We are not a party to the litigation on price thresholds. We paid royalties for deep water leases for the years 1996,

1997 and 2000, when the price thresholds had been exceeded.

Shell holds some 73 deep water leases that were acquired in

1998 and 1999 lease sales. Four of these leases are producing.

Minerals Management Services Director Burton stated last week

the Government made an administrative error by omitting price

thresholds in the 1998 and 1999 deep water royalty leases. Shell

stands ready to work with Minerals Management Services and

Congress to address this issue. In fact, Thursday of last week, Shell

sent Director Burton a letter, before I knew about this hearing, expressing our willingness to make a change in our 1998 and 1999

leases by considering the addition of price thresholds. I would like

to submit a copy of that letter for the record.

Mr. ISSA. Without objection, that will be placed in the record.

[The information referred to follows:]

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Mr. HOFMEISTER. We met with her yesterday to begin those discussions.

In addition, we have expressed our desire to resolve the issue to

Members of the House and the Senate.

Mr. Chairman, we agree with you that it is time to resolve this

issue. Shell strongly believes in the sanctity of contracts and would

oppose unilateral modification of legally binding contracts. We do,

however, support price thresholds for Deep Water Royalty Relief

Act leases.

Mr. Chairman, this concludes my remarks. I am available to answer any questions you or the committee might have.

[The prepared statement of Mr. Hofmeister follows:]

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Mr. ISSA. Thank you, sir.

Mr. Limbacher.

STATEMENT OF RANDY LIMBACHER

Mr. LIMBACHER. Good morning, Mr. Chairman and members of

the subcommittee. My name is Randy Limbacher. I am the executive vice president of the Americas for ConocoPhillips. Prior to my

current position, I was the chief operating officer at Burlington Resources.

I am pleased to appear before this subcommittee this morning to

address ConocoPhillips’ holdings in the Federal offshore oil and gas

leases that were issued by the Department of the Interior during

1998 and 1999, and that do not incorporate price thresholds with

respect to applicability of royalty relief for deep water production.

Before I get to the core of my statement, I would like to emphasize that ConocoPhillips’ current upstream asset base consists primarily of the heritage assets of Conoco, Inc., Phillips Petroleum Co.

and Burlington Resources, three previously independent companies

that have combined over the past 3 years to create ConocoPhillips.

The prior actions or positions taken by any one of these companies

is not necessarily reflective of those of ConocoPhillips.

In the short time we had available, we conducted a review of our

lease files, and as a result determined that ConocoPhillips holds interest in 34 leases issued during 1998 and 1999, that do not incorporate price thresholds with respect to the eligibility for royalty relief for deep water production. While some of these leases were acquired by one of our heritage companies at OCS lease sales directly

from the Department of Interior, others were obtained in transactions with other companies. In addition, ConocoPhillips has relinquished or transferred to others interest in leases that its heritage

companies acquired during this timeframe.

However, regardless of the manner obtained, the most important

point for this committee’s understanding is that none of these 34

leases are producing oil or gas, and as a consequence, no deep

water royalty relief is presently being taken by ConocoPhillips. I

am aware of the recent controversy concerning the appropriateness

of royalty relief for deep water production in today’s oil and gas

pricing environment. However, this has not been a significant issue

for our company, as we have not been in a position to make use

of the incentives under the 1998 and 1999 leases.

We can say that ConocoPhillips, our current policy is that we

don’t believe royalty relief in the current price environment is justifiable, thus the reasons for the thresholds. And we are not pursuing such relief. We are willing to enter into dialog with Interior on

these particular leases.

Mr. Chairman, as you might imagine, with the numerous mergers that we have undergone in recent years to become

ConocoPhillips, our Federal lease holdings have undergone constant change. The information presented here today reflects our

current lease situation regarding lease issues in the period of question. I would be most happy to respond to questions that members

of the subcommittee might have relating to our leasing practices or

related subjects. I thank you again.

[The prepared statement of Mr. Limbacher follows:]

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Mr. ISSA. Thank you.

Mr. Cejka.

STATEMENT OF A. TIM CEJKA

Mr. CEJKA. Thank you, Mr. Chairman, Ranking Member Watson.

My name is Tim Cejka, and I am president of ExxonMobil Exploration Co., global in reach. I am located in Houston and I am

pleased to be here to be involved in this discussion.

Energy continues to be a topic on many Americans’ minds, particularly as we move into the summer driving season. We know

that your constituents need reliable supplies of affordable energy

not only for fuel for their vehicles, but also to run their businesses,

perform their other activities and help them get through their daily

lives. We understand and share their concern and interest regarding energy supply, so we welcome this opportunity to respond to

your questions.

With respect to the committee’s specific issue for discussion

today, the 1998 and 1998 OCS lease sales and how they were impacted by the Deep Water Royalty Relief Act, I would like to begin

with an overview of what we see as the MMS leasing process.

As you are aware, the MMS issues leases on Federal offshore

lands for oil and gas exploration and development under the Outer

Continental Shelf Lands Act, as well as regulations issued to implement that law. All leases issued are subject to the law and regulations. Before each lease sale, the MMS, after an extensive review

process, publishes a final notice prior to the sale. The notice sets

forth the terms and conditions under which the leasing for that

sale will occur. This was done for all lease sales in 1998 and 1999.

The 1995 act mandated the leasing during this period to be done

with a bidding system that provides for royalty relief. Please note

that the final regulations implementing the 1995 act were issued

in January 1998. I mention this because I wish to emphasize that

all the leases that heritage Exxon and heritage Mobil entered into

with the Government during this period were within full compliance of the laws and regulations at that time.

With respect to 1998 and 1999, OCS leases, given our understanding of the availability of the acreage at that time, heritage

Exxon, heritage Mobil, bidding as separate companies, were in

combination high bidders on 145 leases. To date, we have traded

all or part of our interest in some of these original leases and

formed ventures with other companies on additional blocks, to elevate our ownership position to 159 originally awarded in the 1998–

1999 timeframe.

So far, unfortunately for me, we have drilled three wildcats, all

dry, and are planning to drill a few more over the next year or so.

Because we have yet to discover any commercial volumes of hydrocarbon on any leases and therefore no production, we have not

taken any royalty relief on these leases. At the time the leases

were issued, the MMS was adjusting its policy in accordance with

the Deep Water Royalty Relief Act to promote additional activity

in the deep water at a point in time when activity in this portion

of the Gulf was modest, at best. The structure of the lease agreements enhance the potential reward to the risk if commercial volumes are discovered, something of which we have yet to do.

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As a result of the MMS policy and the Deep Water Royalty Relief

Act, industry has drilled 50 wildcats on the leases from 1998 to

1999, resulting in 15 commercial discoveries, and will ultimately

produce about 1.5 billion oil equivalent barrels, according to the industry analyst, Wood MacKenzie.

The more fundamental issues underlying the question before the

subcommittee today are the rule of law and the issue of contract

sanctity. First, ExxonMobil adheres to all applicable laws and regulations with respect to the lease agreements we enter into with the

Government. Second, in the United States and in all countries

where ExxonMobil operates, the issue of contract sanctity is critical

to our business decisions. Any change of prior year lease terms and

conditions would indicate the U.S. Government does not place a

high value on contract sanctity. If this value is undermined, it may

have a negative impact on the investment climate in the United

States.

Since we originally acquired the rights to these 159 leases, we

have formed ventures with several companies and it is unimaginable that we would have to go back to our co-venturers and tell them

that the terms we offered them have changed. Confidence in the

stability of fiscal terms in the United States is one of several key

reasons you have witnessed a resurgence in activity in the United

States.

While the Federal Government, of course, certainly has the right

to change the terms on future leases that it grants on Government

lands, we expect the terms of existing leases to be honored. Any attempt to revoke or retroactively renegotiate leases previously

granted by the Federal Government we think would set a bad example and discourage future industry investments.

As a U.S. energy company that has the scale and financial

strength to make the future investments needed, undertake the

risks and develop the new technologies necessary to provide Americans with greater energy access and greater energy security,

ExxonMobil wants to continue to work with you and be part of an

energy solution to this problem.

Compliance with all provisions of our regulatory agreements is of

utmost importance to us. In 2005, ExxonMobil made royalty payments to U.S. Federal and State authorities of $838 million, and

in addition, provided royalty in-kind production volumes of 6.6 million barrels of oil and 14.8 million cubic feet of gas.

I would like to conclude by stating how proud we are of the recognition we have received for our leadership in the royalty arena.

Just since 1998, we received the Department of Interior’s Safe Operations and Accurate Reporting [SOAR], award four times, including 2005. The SOAR award is given to the OCS lessees who demonstrate excellence in operational safety and financial reporting.

We have also received the Mineral Revenues Stewardship award

twice since 2003. The Mineral Revenues Stewardship award recognizes companies with outstanding records for low error rates, timely payment and responsiveness to compliance and enforcement requests and orders.

Thank you for your time and consideration for these hearings.

[The prepared statement of Mr. Cejka follows:]

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Mr. ISSA. Thank you, Mr. Cejka.

Mr. Pilcher.

STATEMENT OF GREGORY F. PILCHER

Mr. PILCHER. Mr. Chairman and members of the subcommittee,

I appreciate the opportunity to be here today. My name is Greg

Pilcher, and I am senior vice president, general counsel and corporate secretary of Kerr-McGee Corp. My company, Kerr-McGee, has invested over $3.5 billion in deep water operations in the Gulf of Mexico, including over $450 million

in bonuses and rentals to the Government. This year, we budgeted

approximately $650 million for the deep water Gulf, and we continue to do our part to help expand the supply of energy products

for the American people.

I would like to begin briefly with the act itself, which was intended to promote investment in the deep water Gulf, and help reduce our dependence on foreign oil. The deep water Gulf is a challenging environment. We operate in waters up to a mile deep, 100

miles from land and face annual threats from hurricanes. Each

project entails significant risk and requires the investment of tens

and sometimes hundreds of millions of dollars.

When a company hits a dry hole, which happens much more

often than not in the deep water Gulf, industry absorbs the loss.

There is no refund of bonuses paid to the Government and no revenues from production. These projects are long term investments

with a time horizon well beyond the cyclical ups and downs in

prices.

Now, a decade later, it is evident that the act has been an enormous success. Since 1995, industry has drilled almost 1,000 exploration wells and announced more than 125 discoveries there. Deep

water production is up dramatically. Government revenues from

upfront bonus payments from 1996 through 2000 increased by $2

billion. Tens of thousands of American jobs have been created.

When we are successful, royalty relief under the act for initial

volumes helps us recover our massive investment, as well as offset

our losses for failed projects. Of course, once production from a

deep water lease exceeds the minimum volume, we pay royalties at

the full rate.

Without the incentives of the act, we never would have made the

decision in the 1990’s to invest billions of dollars in these projects.

The decision looks like a simple one now, given high prices. But at

the time of the decision, the energy industry was struggling and

was very reluctant to make substantial investments in exploration.

It would be unfair and unwise for Congress to take any action that

would change the rules established at the time the investments

were made.

Now I would like to turn to the leasing process. The key point

here is that the terms of offshore leases are not negotiated. The

form of the lease, including its royalty language, is dictated by Interior, and those terms are not negotiable. Those terms, however,

must comply with the law and the lease itself states that it is governed by then-existing law.

The only decisions for companies in the leasing process are

whether to bid for and how much to bid. The only part of the lease

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that is determined by the company is the size of the bonus offered

in the competitive auction. Thus, there were no negotiations on the

terms of the leases that are the subject of today’s hearing. And I

am not aware of any discussions between Kerr-McGee and Interior

about lease terms before the issuance of the leases in 1998 and

1999.

With regard to the absence of price triggers from the 1998 and

1999 leases, Kerr-McGee believes that Congress did not give Interior authority to include price triggers in any leases sold during the

5-year period after the act. In short, we don’t believe that the absence of price triggers from leases awarded in 1998 and 1999 was

a mistake. To the contrary, the absence of price triggers was necessary in order for those leases to be consistent with the law.

We think this is clear because: first, from the act itself, which

mandates the suspension of royalty on certain minimum volumes

specified by Congress for the leases in question; second, from the

legislative history of the act; third, from the Federal court decision,

which held that Interior does not have discretion to put conditions

on the royalty relief specified by Congress; and fourth, from Interior’s own regulations, which do not provide for price triggers on the

leases in question.

Ultimately, the courts should decide whether we are right or

wrong, and of course, we will honor whatever decision the courts

make.

In conclusion, we believe the act should be recognized as a success, even though the act has only just begun to bear fruit to provide important new domestic energy sources. Regarding discussions, and as I have said to Members of Congress, we have had discussions with the agency in an effort to resolve our dispute, and

we remain willing to discuss potential resolutions.

Mr. Chairman, thank you for the opportunity to testify. We stand

ready to work with the subcommittee as you continue your investigation of this matter.

[The prepared statement of Mr. Pilcher follows:]

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Mr. ISSA. Thank you.

Mr. Siegele.

STATEMENT OF PAUL K. SIEGELE

Mr. SIEGELE. Mr. Chairman and members of the subcommittee,

on behalf of Chevron, I wish to express my appreciation at having

the opportunity to appear here today to discuss the Department of

Interior’s Deep Water Royalty Relief Program.

As vice president, deepwater exploration and projects, my job responsibilities include looking for new sources of oil and gas in the

deep water Gulf of Mexico. My previous position was General Manager for Deepwater Exploration.

Chevron participates at every stage of the MMS Gulf of Mexico

leasing program. As to lease sales, Chevron uses sale notices to determine on which tracts it will bid for exploration. Importantly,

Chevron and other bidders are not able to negotiate lease terms.

Rather, we submit upfront sealed bonus bids. The MMS evaluates

the high bids for adequacy, and if deemed acceptable, the MMS

prepares the lease, along with its addenda and stipulations.

Successful high bidders must execute the leases as drafted by the

MMS or forfeit their deposits, 20 percent of the bid bonus. Once finally executed, leases are binding contracts.

Deep water leases give exploration rights, but in most cases, no

oil or gas is found before their term expires, and the leases revert

back to the MMS. Deep water exploration is costly. Over the past

10 years, Chevron has spent in excess of $3 billion in deep water

exploration costs.

When oil or gas is discovered, significant additional expenditures

must be made to build producing facilities. For example, Chevron

and its partners are spending $3.5 billion to develop one of its recent Gulf of Mexico discoveries expected to come on production in

2008. Once production from any lease begins, Chevron pays royalties as the oil and gas is produced and sold and Chevron is one of

the Federal Government’s largest payers. In 2001 through 2005,

Chevron paid the MMS in excess of $2.8 billion in Federal royalties.

Turning to the chief question which this subcommittee seeks to

answer, Chevron has the following understanding regarding the

omission of price thresholds from the leases sold in 1998 and 1999.

After the first lease sale in 1998, Chevron questioned MMS’ regional office in New Orleans regarding the apparent omission of

thresholds. They indicated they believed the thresholds were incorporated in the leases through a reference to the regulations governing royalty relief. Some time after the thresholds were re-introduced in 2000, the MMS indicated to Chevron that an oversight

had in fact occurred, and that the 1998 and 1999 leases did not

have thresholds as part of their terms.

Chevron has relied on the terms of its 1998 and 1999 leases in

making investment decisions. When Chevron enters into a contractual arrangement with the Federal Government, or with any other

partner, Chevron honors its contractual terms. Chevron expects the

same of its counterparts.

Chevron understands that in the very near future, the MMS will

be sending letters to Chevron, and to other companies, requesting

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meetings to discuss the absence of price thresholds in these leases.

Chevron has great respect for the MMS. If requested, Chevron will

meet with the MMS to discuss the 1998 and 1999 leases, and Chevron will seriously consider any proposals the agency may make.

Again, on behalf of Chevron, I wish to express our gratitude for

being given the opportunity to appear here today and to discuss

our views on deep water royalty relief. I would be happy to answer

any questions you may have.

[The prepared statement of Mr. Siegele follows:]

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Mr. ISSA. Thank you. And again, I want to thank the panel in

these few minutes giving us more candid information about your

understanding than we have gotten from the Department of Interior in months of work. Your candor is important to us, and as we

go through the questions and answers, if we continue this way, this

will be the most fruitful of all panels we have yet had before this

committee.

Mr. Siegele, you said that in 1998, your company contacted the

Department of Interior when you noticed that the thresholds were

not in the body of a lease that you received, is that correct?

Mr. SIEGELE. We contacted the regional office of the MMS in

New Orleans. That is correct.

Mr. ISSA. Who was that at the regional office? Do you have

records of that?

Mr. SIEGELE. I don’t know. I was not personally involved.

Mr. ISSA. But it was in writing? Is there a correspondence trail?

Mr. SIEGELE. It was a meeting. And I could provide the names

of who attended in Chevron, but I am not sure who attended at the

MMS.

Mr. ISSA. That would be very helpful, if you could provide those

names, that would allow us to followup in hopefully a less formal

manner.

At that time, your company was informed that these were going

to be not in the body but in the rulemaking. But that still begs the

question, if you recognized that they weren’t there, when did your

company become aware, between that and 2000, that you might not

have to pay, even if the price went above a certain level?

Mr. SIEGELE. It would have been after the price thresholds were

re-introduced in 2000, maybe even 2001.

Mr. ISSA. Well, then, I have to ask this question, because I think

it is extremely important, when your company, when Chevron was

making their analysis of what you were going to pay, what the

value of these leases were and so on, you assumed you were going

to pay on price thresholds at that time. So it didn’t, and I don’t

want to put words in your mouth here, but it didn’t affect your decision process. The 1996, 1997, 1998, 1999, 2000, these were all the

same from a standpoint of how you would work your relationships,

your contracts, and more importantly, where you choose to invest?

Mr. SIEGELE. Yes, I think this is a critical piece. There are two

very different periods of investment. So what you said is correct for

the leasing decisions. That is the amount of bonus that we were

going to pay to secure the lease. That is a relatively small investment decision, compared to when we are going to drill the well, or

more importantly, when we are going to invest the development

dollars upon success.

So there are various stages of investment decisions. It is important to segregate out the early understandings, when we are making the bids, from later understandings, when we are making big

investments.

Mr. ISSA. So if I understand correctly, up until 2000, the understanding was that they were all the same. Starting in 2000, would

it be fair to say that the leases signed in 1998 and 1999 now had

more value, because in a quickly spiking up energy market, these

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offered you the ability to take natural resources it found at a less

total cost?

Mr. SIEGELE. I think it is correct to say that they had more

value. It would be not correct to assume in 2000 that prices were

spiking up. Prices have really only spiked up in the last year, year

and a half. So in 2000, prices were probably at $30 a barrel.

Mr. ISSA. But would it be fair to say that today, when you are

choosing where to drill, you are drilling in the 1998 and 1999

leases, versus the ones that have thresholds? In other words, it is

a better return on your investment if you find resources in those

areas in which you get X amount of, in this case natural gas, before

you pay? They are just simply better leases to you.

Mr. SIEGELE. That is correct.

Mr. ISSA. And at the time you were bidding, though, you didn’t

know this. So you bid as though they had a threshold?

Mr. SIEGELE. That is correct also.

Mr. ISSA. OK, so it was, oddly enough, a windfall due to a clerical

error?

Mr. SIEGELE. I wouldn’t characterize it as a windfall.

Mr. ISSA. Well, you wouldn’t have when you bid it. But today, I

am assuming you would consider it a windfall to find out you had

2 years worth of leases that you didn’t bid any higher for, you

didn’t pay any more for, but they are going to generate more revenue if productive.

Mr. SIEGELE. What I would say is at the time of the leases, no one envisioned $70 oil. So it is important to put the decision in the

perspective of the oil price of the day and what we are facing today.

The important thing for us is that we honor the contracts and we

understand we are in a different situation today, and we are willing to them the MMS about that.

Mr. ISSA. I appreciate that, and I appreciate the willingness of

many of the companies to proactively say, ‘‘we want to work our

way through a clerical error.’’ I also hope that all of your companies

will appreciate that the United States is built on a body of law that

says we do honor contracts. In fact, although there is the question

of whether or not the contract says one thing or not, this committee, and I believe all aspects of the Federal Government, wants to

be a role model for the world that in fact we do not arbitrarily

change contracts simply because the price of oil goes up. We have

seen that in other parts of the world. We see it going on today. I

for one, believe that no one in Government wants to renegotiate,

simply because prices went up. Hopefully that is something that

your companies rest assured that when dealing in the United

States, that will never be a concern, although I am very aware of

some of the countries where it not only is a concern but a reality.

Back to the question, though, of 1998, 1999, because of your experience, would you say that had you known, in 1998 that you

didn’t have price thresholds, that it would have had some value

based on the what-if scenario? Remember, the thresholds were

$28.50. This was not an unreasonable expectation that we might

inch above $3.50 for natural gas, because that was certainly forecast, that would happen, or that oil could once again get above the

threshold that might be below $70, but certainly above the $28.50

that was in the other contracts.

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Mr. SIEGELE. Are you talking about 1998 specifically?

Mr. ISSA. If you were bidding in 1998 and knew that there were

contracts over here that had thresholds and contracts over here

that didn’t, and you were going to bid two squares next to each

other, would you have bid a different price for that value?

Mr. SIEGELE. It is a bit speculative, my answer, but I would say probably not. In 1998, oil was at $12.50 a barrel, and companies

like mine were scrambling to stay in business. So it was difficult

to envision at that time how high prices might be today.

Mr. ISSA. OK, as I did in the first panel, and all of you were here

for hat, I would summarize and say, as the first two panelists said,

that if prices went so high, that the value went two, three, four

times as high, it never concerned you that you might not get royalty relief, because at that point you wouldn’t need it. In 1998,

looking forward, if somebody had said, what if natural gas triples

or what if oil goes to $70 a barrel, you would have said, well, then

we don’t need royalty relief, correct?

Mr. SIEGELE. I think it is important to come back to, in 1998,

that is one thing. Subsequent decisions have been made up until

today based on the contracts and how we understand the contracts.

And the 1998 decisions were, relatively speaking, minor investments compared to the investment decisions we are facing today.

Mr. ISSA. I very much agree with you.

Before I yield to the ranking member, Mr. Hofmeister and Mr.

Limbacher, you both indicated that, if I understand correctly, that

this is something that you believe that between your companies

and MMS that an understanding similar to what I just said with

Mr. Siegele, you would be able to say, ‘‘you know what, we are

making enough money now that we are perfectly happy in future

development of some of these wells that aren’t even yet developed.’’

You would be willing to have those thresholds in, or believe that

since it was bid, believing they were in, that in fact that could be

negotiated with MMS. Is that a general understanding, that your

companies would hope to be able to do that, outside of any court

involvement or congressional involvement?

Mr. HOFMEISTER. The important principle to us, Mr. Chairman,

is that we have and we will continue to support the Deep Water

Royalty Relief Act. We believe it is a sound piece of law, and so it

is a basic principle to us.

Second, given the sanctity of contracts, we would expect to reach

a mutually agreeable way forward. Those are the discussions that

we have entered into.

Mr. ISSA. I appreciate that. Mr. Limbacher.

Mr. LIMBACHER. I believe my comments would be similar. We do

agree that in this price environment, that we don’t require royalty

relief to justify the development of such projects. We are willing to

enter into a discussion. When you say renegotiation, we just need

to know what that proposal looks like and understand all the

pieces, rather than just make a blanket statement that we are

going to do this or that.

Mr. ISSA. Of course.

Mr. LIMBACHER. We do have business partners, and a lot of these

leases that we need to just make sure that are not making a comment, that we are not able to carry out later on due to those dealVerDate 11-MAY-2000 13:00 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 C:\DOCS\33391.TXT HGOVREF1 PsN: HGOVREF1
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ings or create another legal issue with another party as a result.

But the answer is, we are certainly willing to enter that dialog

based on those facts.

Mr. ISSA. Right. And hopefully, if I used the word renegotiations,

I apologize. My intention was to say that, to the extent that your

companies support the concept that there was a clerical error made

that at the time of bidding, most companies didn’t understand

there wouldn’t be thresholds. However, you may have acted in good

faith and you may have contractual obligations that make it to

your detriment. You have acted to your detriment potentially in

later contracts, that clarifying or clearing up a clerical error is not

as easy as simply putting it back into the contract, because you

have acted on it.

So my intention of talking about the meetings is that those meetings are good faith meetings to deal with the problem of what now

appears to be a fairly significant clerical error that has financial

impact. But this Member, and I think, I’ll speak a little bit for the

ranking member, we are not trying to void contract sanctity. That

would be the last thing that I think an American Congress would

ever do.

Mr. Cejka, your position was slightly different in your opening

testimony. Would you clarify how you view engaging with MMS as

to these 2 years?

Mr. CEJKA. Yes. I go back just a bit. Similar to the conversation

from Chevron, we take a look at the royalty aspects, all the fiscal

aspects of a contract at the time we bid and at the time we decide

to drill a wildcat well, and then again when we are about to make

a development decision. And at that time, 1998, 1999, as best I can

determine in talking to people who were active in that area at that

time, we assumed, maybe with good intent, that the MMS intended

to leave them out. We noticed they were out.

But we also noticed activity in the Gulf was at a very low point.

We assumed they were creating an additional incentive. So when

we bid on those tracts, we bid with the understanding that they

were not, the price thresholds were not in. Did we question that?

No. And much like my associates have said, it is not a negotiation.

MMS hands you a form and you agree or you don’t get to play the

game.

Now, today, what would we do today? As with any good faith effort, we are always willing to meet with the MMS, with any other

branch of the Government, and discuss issues. We, as my other

members have said, are very concerned about contract sanctity.

But working with the Government is, I think, our duty, and we

would be happy to participate in discussions.

Mr. ISSA. Excellent. So if I understood you correctly, you clearly

understood it, thought it was an incentive, which I think is different than any other testimony we have had so far. It certainly

was quite an incentive. Did that induce you to bid, or did that actually, in your opinion, raise what you were willing to bid? Did you

bid higher as a result, in your opinion?

Mr. CEJKA. To tell you the truth, neither. Going back in my

memory, the biggest issue we had with the deep water was geologic

risk. We were bidding our tracts as to the favorability of the geoVerDate 11-MAY-2000 13:00 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 C:\DOCS\33391.TXT HGOVREF1 PsN: HGOVREF1
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logic setting. We thought as any piece of a fiscal package is, that

was a good thing.

Did it encourage us to bid more? No, I’d say it was in our minds,

but what we really bid was geologic risk. Now, that would impact

us in the future, if we had to make a decision and we were on a

marginal development. Would that help a marginal development

come on production? We would consider it very seriously then.

A big discovery that is overwhelming may not need the help. A

marginal discovery that could add volumes for U.S. citizens might

not get developed without some relief. So that is how we would

have done that analysis. First, geologic risk. Then are the terms acceptable, then we would have bid.

Mr. ISSA. I see. So you picked based on your belief that you

would come up with, I guess they would be wet holes if they are

not dry holes. OK, well, that is good.

Mr. CEJKA. Unfortunately, my track record is three dry holes. So

I hope the next three I drill will not be the same.

Mr. ISSA. I have been going to Las Vegas for over 25 years, and—

no, I did it for business. [Laughter.]

The only reason I can say I came back with oil is that I went

to the show and sold my product. I understand that there are many

places in which you can have those kinds of odds, and Las Vegas

probably offers better odds than drilling in deep water.

I am interested in Exxon, specifically, you recognized immediately that these thresholds were not there. You believed that they

were intended not to be there. Do you have written documentation

that is timely in that, either as to meetings or correspondence, either within the company or to Department of the Interior or any

part of U.S. Government that would help illuminate that you in

fact recognized it and acted on it?

Mr. CEJKA. The only communication of a written form we have

with the MMS was actually quite I’d say minor and technical. We

were confused by the definition of field, which as you understand

later was corrected by the court.

Mr. ISSA. The Fifth Circuit did a great job of correcting that understanding.

Mr. CEJKA. So the one formal communication we had with the

MMS was, please clarify that definition. So it was a very minor,

technical question.

Internally, I am not sure that there is a written document. The

review process is the manager of the area would express an intent

on fiscal terms, whether they were appropriate or not appropriate.

That person may or may not have included that in their actual

presentation package. We would be happy to look.

Mr. ISSA. I would appreciate if you would look for it.

I might note that in 1996, March 1996, taking from one of your

correspondence, it says, ‘‘only the product that receives a price that

exceeds the ceiling price should have royalty relief suspended. All

tracts in upcoming sales are eligible for royalty relief, as stated in

the law, the ceiling price only applying to existing leases.’’

Unfortunately, of course, that is prior to this thing that it appears as though your trade association and each of your companies

in various ways, and I am just citing yours, because we are on that

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subject, in 1996, your companies expected the Royalty Relief Act to

have triggers for price in addition to volume.

OK. Mr. Pilcher, I have gotten everybody else but you. I am very

interested in your bidding process, what you thought was in the

act. Did you believe the act would have price thresholds? Did you

bid based on price thresholds and so on? If you could sort of echo

some of your colleagues as you see it.

Mr. PILCHER. Sure, I will try to.

As I said in my testimony, we don’t believe that there was a clerical error or any other kind of error involved in connection with the

1998 and 1999 leases. To the contrary, we think the 1998 and 1999

leases, and specifically the absence of the price trigger or price

threshold in them reflects precisely what Congress had done when

it passed the Deep Water Royalty Relief Act back in 1995, and that

the absence of those price triggers was simply the manifestation by

the Department to do exactly what Congress had ordered the Department to do through that act.

We think the errors were in the other leases, in the prior years,

when those price triggers were included. We think the law was

clear at the time Congress enacted it in 1995. We think it remains

clear today. I think that is consistent with the regulations and the

rules that I heard the first panel talk about in terms of them, consistent with the act, not including price triggers. I think what has

happened is the Secretary has effectively usurped Congress and

taken authority Congress did not grant the Secretary for that period in question, for that 5 year period, when the Secretary sought

to include price triggers in those leases.

Mr. ISSA. OK, so let me see if I can understand. Your company,

which is by far the premier deep water drilling company, as I understand it, with all due respect to the others, numerically you are

very, very active, and it is the biggest part of your portfolio. Some

of these other companies are involved in much broader, different

areas. But this is really what Kerr-McGee does.

And let me understand, are you an API member?

Mr. PILCHER. We are a member of API, that is correct.

Mr. ISSA. Are you aware that they published clearly an understanding, and of course they were part of writing the legislation,

that there would be price thresholds?

Mr. PILCHER. I know the API publishes a lot of things and a lot

of good things. I am unfamiliar with the specifics of any particular

one.

I think I heard you or one of the witnesses talk about the applicability of price thresholds to existing leases. If that is what you

are referring to, I think the concept of existing leases is a term of

art under the act that applied to leases that were in effect prior

to the enactment of the act in 1995.

Mr. ISSA. We were actually citing, among others, the American

Petroleum Institute’s document dated April 8, 1996, in which they

say, ‘‘for existing leases,’’ and then it says, and this is bolded for

me, ‘‘MMS should lift the suspensions only for products whose price

ceilings have been reached.’’ It appears as though they were anticipating this continuing, because they were involved in the rulemaking at this time, they were proposing this into the rulemaking.

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But let me ask you, you received leases in 1996, 1997, 1998, 1999

and 2000, is that correct?

Mr. PILCHER. Yes, sir, that is correct. I am not sure if we received leases in every one of those years, but we probably did.

Mr. ISSA. OK. So in 1996 and 1997, those leases specifically had

price thresholds in the body of those lease documents that your

company and Department of Interior signed?

Mr. PILCHER. Well, not quite. They had threshold or price trigger

provisions that were discussed variously by different people, not in

the main body of the leases, but in the addenda.

Mr. ISSA. OK, they are in the addendum. But that is considered,

that is the lease.

Mr. PILCHER. Absolutely. It is part of the lease. It is just not the

main body of the lease.

Mr. ISSA. That is correct. When I lease out one of my commercial

buildings, the template that shows what the county considers to be

the lot is separate, but we clip it in there and everyone understands that when you figure out where your parking spaces can be,

it is based on that.

So you signed those in 1996 and 1997. There wasn’t any duress,

was there?

Mr. PILCHER. On signing those leases?

Mr. ISSA. Yes.

Mr. PILCHER. No, there was no duress.

Mr. ISSA. And so you would expect that, contract sanctity says

that you live up to what the lease says?

Mr. PILCHER. I absolutely believe in contract sanctity. As we

have discussed, this is an auction process. The leases themselves

are not negotiable. The only decision we, the companies, make in

this process is whether and how much to bid. The leases are dictated by the Department as a matter of law. The guiding principles

that apply to the Department are the authority that is granted to

the Department by the Congress. As a matter of law, that is how

it works.

But in this case, in particular, the fact that the law, as enacted

by Congress, governs these leases, is recited in the leases themselves. The leases themselves say they are subject to the law. And

we believe the law is clear. We think it was clear in 1995 and we

think it is clear today.

Mr. ISSA. I appreciate that. In 1996, 1997, 1998, 1999, 2000, to

the extent that you signed leases, and at least in 1996 and 1997

it was very clear the thresholds were there. Starting in 2000 it was

again very clear, when did you first correspond in writing, in a

legal format, since not only you were an attorney, but these were

big dollars, it is done in a very legal, reviewed process, when did

you first say to the Department of Interior, yes, we have signed

this lease, but no, we shouldn’t have to pay this if price thresholds

are not reached—or reached?

Mr. PILCHER. As I mentioned, it is an auction process, so we

didn’t negotiate——

Mr. ISSA. No, no, and I understand that. But you signed leases

that had provisions you believed were not correct, based on intent

of Congress. When did you first tell the U.S. Government that you

had signed these documents but in fact, you did not intend to pay

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royalties if prices reached a certain point? When did you alert the

Government that in fact this provision was invalid, in your opinion?

Mr. PILCHER. The first occasion we had to do that, although I

don’t know the precise date, would have been promptly after the

Government notified us that it intended to actually enforce a provision of the lease we thought was improper and was inconsistent

with the act. I just don’t know the precise date, but it would have

been right after that. It would have been at a time after prices had

come up.

Mr. ISSA. OK. So basically from 1996, whether it was in the document, whether there was a defect or not, from 1996 through 2004,

you didn’t intend to pay if the price of gas went up. You intended

to rely on your internal, quiet opinion that you had signed something which you believed was unenforceable and you would deal

with it if it happened. In the meantime, you would say nothing,

similar to my example of receiving these dollars and not saying

anything to the bank unless they discovered it?

Mr. PILCHER. We intended from the very beginning to be governed by the law as enacted by Congress.

Mr. ISSA. But you expressed that you have an opinion on that,

and if I understand correctly, and this is different than some of the

other oil companies’ positions, which are not identical, but varied.

Every one of them varies from yours. You developed an opinion, apparently back in 1996 when you first signed a contract that said

it had a price threshold, that the act of Congress was in fact different. You believed that if you hit that threshold you would not

pay, and you never told the Government that.

Mr. PILCHER. We talked about a couple of provisions, somebody

mentioned the Santa Fe Snyder case and the fact that these improper field designations had been included in there, which is consistent with the process that applies here. When there is a problem

with the leases, the way those are challenged by the rules, again,

enacted by Congress through the Administrative Procedures Act,

and then by the agency through its implementing regulations, are

to follow the processes that are out there, which we did. We played

precisely by the rules. And when we were told by the MMS that

it wanted to enforce these provisions, we promptly objected to it.

I understand generally that when we objected to it, or at some

point in that discourse, there was this pending Santa Fe case, that

the response we got back from the Government at some point was,

what we understood it to be was, we are unsure whether we are

going to enforce these mechanisms, we are waiting on the outcome

of the Santa Fe case. And as we discussed, we think the Santa Fe

case was pretty clear, where the Fifth Circuit has determined conclusively that Congress was real specific when it determined how

royalty relief should be granted for this 5 year period, and that the

Secretary had exceeded that authority.

We think that same analysis applies to these leases. It was in

error. We intended all along to be bound by precisely what Congress ordered when it enacted the act.

Mr. ISSA. OK, and I am going to turn it over to the ranking member. I just want to mention for all the panelists, I am sure you are

aware of this, I have authored a bill, H.R. 5231, which has been

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referred to the Judiciary Committee, which I also serve on. Congress has the right to take away anything it wants to in the way

of determination from the courts. That is specifically applicable

when Congress passes a law and the intent of Congress is questioned.

So I might bring note here that as the day goes on, I become

more convinced that if we cannot reconcile this with contract sanctity being observed, that errors, to the extent they existed, being

rectified in a non-judicial fashion, that it may very well be appropriate for Congress to take that decision away, Congress determine,

or reclarify what the law meant and turn that down.

I am going to turn over to the ranking member, but I will say

that if I signed a contract that said, I will do X, and then waited

until somebody asked me to do X to say that I never intended to

do it because that wasn’t enforceable, I would say that was bad

faith. I would say that in fact when you negotiate a contract, or

when a contract is given to you as a heads-up, heads-down, you do

have an obligation to at least in a timely fashion say, we believe

this provision is inconsistent. And it doesn’t appear as though that

was done.

Ms. Watson.

Ms. WATSON. Thank you so much, Mr. Chairman.

The Interior Department’s budget plan projects that over the next 5 years, companies, including all of you, will pump about $65

billion worth of oil and gas from public lands without paying a

penny in royalties. So in the New York Times article, they calculated that this will cost the Government about $7 billion over

that time line.

Meanwhile, the oil industry is enjoying the highest profits in history. I know that ExxonMobil just posted the highest revenues ever

in the history of business. I was stunned during the Katrina crisis

to learn that in the quarterly reports, the oil industry recognized

billions of dollars worth of profits and the cost for a gallon of gasoline hit almost near $5.

I know that the MMS can only implement what Congress has

written into law. I think that builds the case for the Markey Bill,

which I described earlier. Let me reiterate it: this bill would ensure

that taxpayers receive the billions of dollars in future royalty payments that they are owed by the biggest oil companies, as payments to drill on public lands.

It would suspend the application of any Federal law under which

persons are relieved from the requirement to pay royalties for productions of oil or natural gas from Federal lands in periods of high

oil and natural gas prices. The bill is H.R. 4749. It would also require the Minerals Management Services [MMS], to renegotiate all

leases that fail to include the specific price thresholds.

I want to thank most of you for being responsible corporate business people. Kerr-McGee is already in court, and that issue that

you have will be settled based on your own court case. Listening

intently to the rest of you, I think there is, and particularly with

Shell, an open-mindedness and an understanding that we simply

need to renegotiate the terms because circumstances have changed.

And I know Mr. Cejka, when you do that dry drilling, it is a bust.

We understand all that.

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But I think in this time when we are facing huge natural disasters, it calls for responsibility on all our parts. My colleague was

absolutely right when he said that these terms need to be looked

at again. That is the way we feel. We need to look at them in the

interest of all parties, particularly the American taxpayers.

I just told my colleague in the Chair that we probably should

have listened to Shell’s presentation at the end, because I think

you have come up with the bottom line of what these hearings are

all about. The title of our hearing was Mismanagement and CoverUps. And the people that we should hold responsible for clarifying

this are not in this hearing today. We hope to have a subsequent

hearing.

You who represent the oil companies are in a dialog with us

about the direction we should go from here on, taking into consideration a different set of circumstances in 2006–2007 than we had

in 1998–1999. I want to thank Shell, particularly, for their agreeing to take another look.

I don’t really have any more questions, Mr. Chairman, because

I think you asked the really crucial questions. I look forward to another hearing and I look forward to the cooperation of the oil companies who collectively have made gigantic profits. I don’t look forward to responding to my constituents in California, many of them

are yours, too, who pay these high prices. Sure, they can run their

cars to go on with the daily duties of their lives, but I certainly

can’t talk to them at this point about relief.

I do hear the willingness of your cooperations to sit at the table

and see if we can work out some relief. And we will also keep in

mind contract sanctity, that we are not throwing out. But I do

think it is time for us to sit at the table again, and thank you, Mr.

Hofmeister, for your willingness in your opening statement, we

didn’t get it until today, and the Chair and I were concerned that

Shell might not even participate.

Mr. ISSA. They gave us the top rack, too.

Ms. WATSON. Yes. So I do appreciate that, and I want you to

know, all panelists, and Mr. Pilcher, you have your responsibilities.

You are now on trial, so I can’t hold you responsible for not being

willing to take another look. That will be determined in the court

that you are in.

But the rest of you, I think you are at a point where you agree

that we have to take another look, and thank you so much for appearing on the panel today. We will continue these discussions, I

know, and Mr. Chairman, thank you very much for giving us the

opportunity to have this dialog.

Mr. ISSA. Thank you, Ms. Watson. I am going to just be very

brief, because I think this has been incredibly profitable for us, a

lot has been learned. Mr. Siegele, particularly, I am very pleased

at some of what you have told me. But it has caused me to ask all

of you for an indulgence. If I could ask each of you to have your

companies, and this is a voluntary request, but I am hoping I will

get an agreement here, to search through and give us copies of all

external correspondence that occurred, in other words, all correspondence that occurred between your companies or consultants

and the Department of Interior or other groups, including the

American Petroleum Institute, that could be in any way relevant

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to your understanding, trying to bring their understanding. Mr.

Siegele, you particularly said there was this meeting, and hopefully

you will get us at least the members of your company that were

there, and hopefully an understanding of who was there from the

Department of Interior, MMS and so on.

To the extent you can provide us those documents voluntarily, it

would be very, very helpful. Additionally, I would ask that you,

each of your companies work with our staff to see what documents

that might be internally sensitive could be negotiated to be provided so that we would have a full understanding of what was

going on within the company as far as understanding that I am not

prepared to subpoena that or to order it at this time. But your voluntary cooperation, as you have been so forthcoming today, would

be helpful.

Ms. WATSON. Mr. Chairman, would you yield for just 1 minute?

Mr. ISSA. I would be happy to yield.

Ms. WATSON. I mentioned a couple of times the bill that we are

going to be considering, H.R. 4749. I would ask also through the

Chair that you take a look at it and maybe Mr. Pilcher probably

will not want to, since you are in a court case at the moment. But

I would like the others of you to take a look at that bill and give

us a critique, give us a response. Is this something that looks feasible?

I am intending on going on as a co-sponsor with Mr. Markey. I

would like to have some guidance and direction from the oil companies as to what you feel about it. We certainly will take your responses into consideration.

Thank you, Mr. Chairman.

Mr. ISSA. I would only ask, is it acceptable for each of your companies to go through, at least here today, make your best effort to

provide those documents, so that we could further determine what

the Department of Interior knew and when they knew it?

Mr. HOFMEISTER. We are happy to do a review, yes.

Mr. ISSA. Thank you.

Mr. LIMBACHER. Yes.

Mr. CEJKA. Yes, sir.

Mr. PILCHER. Mr. Chairman, I have to make a longer-winded answer, I apologize.

Mr. ISSA. We will go on to Paul and come back to you, is it OK?

Mr. SIEGELE. Yes.

Mr. ISSA. OK.

Mr. PILCHER. We are happy to make that review. I don’t think

there is anything that goes to this issue that you are investigating.

The only concern I have is the fact we are in litigation and the documents you may be asking for may be subject to attorney-client

privilege. So I would have to confer with our outside counsel.

But subject to being able to do it, we would be happy to do it.

Mr. ISSA. OK, then I would modify my request to you and ask

that you identify the existence of documents in the normal privileged way, so that we are aware of what they are and then we can

go through whatever negotiations are necessary to glean those. But

if you would identify them, which is standard in discovery, that

would satisfy your not breaching anything. We obviously wouldn’t

take them unless the other thresholds were cleared.

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Mr. PILCHER. Yes, sir.

Ms. WATSON. Mr. Chairman, if I may.

Mr. ISSA. Yes, I would gladly yield again.

Ms. WATSON. Can we put that in writing to them, so they can

respond back? Just give them a letter from our committee?

Mr. ISSA. Right. The committee will give you an official letter,

consistent with the record.

Ms. WATSON. Great.

Mr. ISSA. I want to close by saying that it is not often that a

panel of this type is brought before the Congress. Your willingness

of your companies not only to deliver the highest level of people

knowledgeable in this matter, but your testimony here today is

very much appreciated.

There are a lot of dollars at risk. There is the whole question of

whether the United States believes in contract sanctity, to include,

to be honest, if a mistake is made. We want to maintain that. Your

willingness of many of your companies to make this sort of an offer

that this can be taken care of in a non-judicial fashion is very

much appreciated.

In closing, I didn’t ask questions about whether or not your companies put in reserves in your financial statements, whether these

differences were material and the like. I didn’t do it for two reasons. First of all, this is an internal matter of what you expected

you would gain or not gain.

The primary reason for our hearings today is that we are deeply

concerned that when Congress passes a law, and it clearly was understood in previous hearings, was understood by the Department

of Interior, their system, their bureaucracy allows for—we don’t

have the right on up right now—but it allows for so many signatures on something that clearly got changed repeatedly without

anybody owning up to the fact that if one of them implemented

properly, Congress, and I know that is open to debate here, but if

one of them implemented, then clearly the others didn’t.

Your help in getting to the bottom of this is appreciated.

Additionally, and in closing, the willingness by many of those

testifying to try to come to a business-like solution between the

landlord and the tenant, if you will, to make the entire matter

something in the past is very much appreciated by this Chair.

And with that, we stand adjourned.

[Whereupon, at 11:42 a.m., the subcommittee was adjourned.]

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