Can we afford to give a $40 billion gift to oil companies?

By John Upton

ShutterstockOne of America’s many gifts to oil and gas companies: billions of dollars worth of royalty-free drilling.

What present do you give to the corporation that already has everything?

In the case of Chevron, the U.S. has provided a gift of $1.5 billion in royalty-free drilling in the Gulf of Mexico since the 1990s.

That’s according to a new analysis [PDF] of Interior Department figures by the office of Rep. Ed Markey (D-Mass.), the ranking member of the House Natural Resources Committee. He is calling on his colleagues in Congress to end the handouts.

BP, Chevron, ConocoPhillips, ExxonMobil, and Shell have received nearly $3 billion in royalty breaks, paying nothing for extracting 262 million barrels of oil and 361 billion cubic feet of natural gas, the report concludes. Chevron was the biggest winner, but more than 100 other companies, some owned by foreign governments, have also shared in spoils of leases signed during an era of low oil prices.

“The royalty breaks enjoyed by these companies have already cost $11 billion in forgone revenue,” a press release sent out by Markey’s office states, “and are expected to cost more than $15.5 billion over the next decade — exceeding previous estimates by the Interior Department — and may ultimately reach a total of $40 billion as oil and gas production rises.”

How is this possible? The Washington Post explains:

Once upon a time, the price of oil was so low — dropping under $11 a barrel in late 1998 — that Congress agreed that big oil companies needed incentives to drill for oil in federal waters of the Gulf of Mexico. So in 1995 it ordered the Interior Department to waive royalties on virtually all of the oil and natural gas that would come out of wells drilled between 1996 and 2000.

Markey thinks it’s high time the fossil-fuel sector starts paying more for the gas and oil that it drills out of the Gulf. Again from the Post:

Of course, oil prices have also grown markedly since 1995, up nine-fold from the nadir of 1998.

As oil prices soared, lawmakers and the Interior Department tried to revoke the waiver, invoking a clause requiring that royalties be paid when oil passed a price of $28 a barrel (adjusted for inflation) or when production volume passed certain thresholds.

But one of the companies, Kerr McGee, later acquired by Anadarko, filed suit and won Court of Appeals backing for its assertion that the Interior Department lacked authority under the 1995 act to impose price thresholds. After the Supreme Court decided not to hear the case, oil companies, which had been paying the royalties anyway pending an outcome to the case, received refunds. Markey says the provisional payments show that the companies did not need relief to begin with.

With record high oil prices, the 1995 deal looks worse and worse from the government’s point of view. And Markey is saying that undoing it could contribute a small portion of the revenues needed to avoid the looming automatic spending cuts known as sequestration.

In somewhat related news, federal efforts to improve the fuel efficiency of vehicles, weatherize homes, and roll out solar panels on federal lands could be slashed if Congress and the president can’t agree on a plan to avoid the sequester by Friday.

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Can we afford to give a $40 billion gift to oil companies?