**GAO-07-590R**                      Published: Apr 12, 2007. Publicly Released: Apr 12, 2007.                  

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## Highlights

Oil and gas from federal lands and waters is critical to meeting the nation's energy needs, providing about 35 percent of all oil and 25 percent of all the natural gas produced in the United States in fiscal year 2005. Oil and gas companies that lease federal lands and waters agree to pay the federal government royalties on the resources extracted and produced from these leases. In 1995--a time when oil and natural gas prices were significantly lower than they are today--Congress passed the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 (DWRRA), which authorized the Department of the Interior's (Interior) Minerals Management Service (MMS) to provide "royalty relief" on oil and gas produced in the deep waters of the Gulf of Mexico from leases issued from 1996 through 2000. This "royalty relief" waived or reduced the amount of royalties that companies would otherwise be obligated to pay. In implementing the DWRRA for leases sold in 1996, 1997, and 2000, MMS specified that royalty relief would only be applicable if oil and gas prices were below certain levels, known as "price thresholds," thereby protecting the government's royalty interests should oil and gas prices increase significantly. MMS did not include price thresholds for leases it issued in 1998 and 1999. Because oil and natural gas prices have risen significantly in recent years, the omission of price thresholds on the leases issued in 1998 and 1999 has resulted in significant foregone royalties to the federal government. In an effort to recoup some of these royalties, Interior is currently negotiating with some of the oil and gas companies that own these leases. Congress has also been considering legislative actions to recoup foregone royalty revenues on these leases or to encourage companies to negotiate with MMS. In addition to the foregone royalties on the 1998 and 1999 leases, one company, Kerr-McGee, is currently pursuing a legal challenge to the Interior's authority to place price thresholds on any deep water leases issued between 1996 and 2000 under the DWRRA. If successful, this legal challenge would lead to additional foregone royalties on leases issued in 1996, 1997, and 2000. We reported to the Senate Committee on Energy and Natural Resources in January 2007 that the royalty relief for leases issued under the DWRRA will likely cost the federal government billions of dollars, but that the final costs have yet to be determined. At that time, MMS' most recent estimates of forgone royalties were made in October 2004. In light of these findings, Congress asked us to evaluate the potential for foregone royalties resulting from the omission of price thresholds on the leases issued in 1998 and 1999. We are also reporting on the status of Kerr-McGee's legal challenge to the Interior's authority to set price thresholds for the leases issued in 1996, 1997, and 2000 under the DWRRA, and the potential implications this challenge could have on federal royalty revenues.

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## Topics

Natural Resources and Environment

Energy policyFederal lawFinancial analysisGas leasesNatural gasNatural gas pricesOil leasesPolicy evaluationPrices and pricingRoyalty payments