Article Surfing Archive

When the government passed the Deep Water Royalty Relief Act in 1995, it had no idea that oil prices ten years later would be more than triple, giving oil companies record profits.

Back in 1995, the government wanted to provide incentives to companies to take on the high costs and risks of drilling for new oil wells. Back then, oil was cheap and the oil companies claimed they didn't have the profits to justify the risk of drilling.

In exchange for the oil companies taking the risk on drilling, the government agreed to drop royalties for drilling on federal lands and water in the Gulf Coast. This might have been necessary back when oil was twenty bucks a barrel, but today it's up around seventy and the oil companies certainly can not claim they don't have enough profits to justify taking a risk.

With the high price of oil today, the government is loosing millions of dollars in royalties. In the original legislation, there are trigger points--$35 a barrel for oil--where the companies would start having to pay royalties.

The cost of oil has been well above the trigger point for several years and will likely stay that way for the next several years, but companies are still not paying royalties. This is because oil companies who took out federal leases in 1998 and 1999 had the trigger prices waived. Most observers think it's high time for the royalties to be reinstated.

For the years between 1996 and 2000, Congress was not specific in price thresholds, and many oil companies are arguing that since no threshold was set, the government has no right to demand the royalties. Some executives have even threatened lawsuits if the government demands royalties. As of February 2006, Kerr-McGee is the only oil company who had followed through with that threat after the Interior Department asked 41 oil companies to pay over $500 million in royalties for 2004.

"It was not Congress's intent that if oil was at $10 a barrel, there should be royalty relief," said Republican Representative Richard W. Pombo. "But at $70 a barrel, don't expect royalty relief."

Unbelievably, the oil companies DO expect it, and for the most part, they've been getting it. Does this seem fair to you when the price for a gallon of gas hovers around three dollars and the entire economy is being negatively impacted?