1st Quarter, 2010
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1st Quarter, 2010 |
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Supreme Court Declines Oil Royalties Case
By Shuja Akram, CPA, Tax ManagerA Texas-based oil company won its bid to hang on to about $350 million – part of billions in Gulf oil royalty payments the federal government will lose – as the U.S. Supreme Court declined to consider the closely watched case. The federal government stands to lose around $19 billion as a result of the case, Kerr-McGee Oil & Gas Corp. vs. the Interior Department. The government unsuccessfully argued that Kerr-McGee, which was later bought by the Woodlands-based Anadarko Petroleum Corp., owed royalty money for drilling on federal leases in the Gulf of Mexico. Kerr-McGee refused to pay, citing a 1995 law designed to promote energy exploration in the Gulf of Mexico when oil prices were low, i.e., approximately $10 a barrel. To the government’s chagrin, the law also waived royalty payments until a specific amount of oil and gas was produced without regard to the price. In the case, at issue were eight deepwater leases Anadarko obtained when it acquired Kerr-McGee Corp. in 2006. Kerr-McGee obtained the leases from the government between 1996 and 2000. The government sought to collect royalties on the leases after oil prices began to rise. Because the high court did not take the case, the decision by the 5th U.S. Circuit Court of Appeals in favor of Anadarko stands. The 5th Circuit ruling also affects dozens of other energy companies that had signed leases in the Gulf of Mexico between 1996 and 2000, under the Outer Continental Shelf Deep Water Royalty Relief Act of 1995. In its appeal, the government stated, "Whatever the precise amount of forgone future royalties proves to be, the total cost will be huge and it will have a direct adverse affect on the Treasury." Anadarko counters this by stating the law has helped bring oil exploration to the Gulf of Mexico during a period of low energy prices. Anadarko said the law is intended "to assure that companies were afforded the royalty treatment it granted as encouragement to make huge investments in the deepwater Gulf of Mexico frontier." While both sides of the matter can be understood, the strict interpretation of the law favors the company. The oil industry has been following the case, both because it will affect some balance sheets and to judge whether the government makes good on its contracts. For instance, Houston-based Mariner Energy, Inc. and its subsidiary drill on six similar leases, according to a 2009 financial filing. Mariner has withheld royalty payments during the litigation. The company had set aside $57 million in case it owed the royalties, the filing indicates. "The goal of royalty relief was to encourage producers to take risks to develop the nation's resources," said Bill Mintz, spokesman for Houston-based energy company Apache Corp., which does not have production from the lease sales in dispute. Interior Secretary Ken Salazar said in a written statement that the royalties should have been collected, but the department "will work with all involved in the days ahead to determine the best way forward." Other articles in this newsletter:
Year in Review Industry Goes on the Defense Interior Department Actively Takes Position |
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Shuja has over twelve years of professional accounting experience and serves as a Tax Manager in the Houston office of HEIN & ASSOCIATES LLP. He assists public companies of all sizes in the energy industry with tax compliance and consulting work, including entity classification in support of partnership formations. He is also experienced with FAS 109, cost and percentage depletion schedules, and sales and use tax examination. In addition, Shuja specializes in consolidated return issues as well as S corporation transactions.