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Tech Central Station


Royalty Pains

January 18, 2007

By Max Schulz

The final big-ticket item in new House Speaker Nancy Pelosi's first-100-hour agenda, to be taken up today, is an energy proposal that will do nothing to help achieve long-term energy security. Instead it will merely serve to satisfy Democratic bloodlust about "Big Oil" and the energy industry's recent high profits.

The heart of the Democratic proposal is a stated plan to roll back corporate welfare for oil and gas companies, using those savings to invest in alternative energy technologies. Congressional leaders also want to restructure the royalty payment system for leases in the Gulf of Mexico that they say will fleece taxpayers of more than $10 billion.

In reality, the plan is designed largely to punish oil companies because of their profits, and to continue beating up the Bush administration for supposedly too-cozy ties to the petroleum industry. An additional bonus for Democrats is the irony that the scandal over lost royalty payments traces back not to any oil industry or Bush administration perfidy, but to gross mismanagement on the part of the Clinton administration Interior Department.

Democratic candidates across the country last fall campaigned on repealing the tax breaks to Big Oil that were said to be a prominent feature of the energy bill President Bush signed in 2005. Critics including Rep. Pelosi lambasted the major oil companies for garnering tax breaks they didn't need at a time of rising crude oil prices and record billions in profits.

But, contrary to Pelosi's accusations, the tax breaks in the energy bill were neither requested by, nor included to benefit, Big Oil. In late 2005, at a contentious Senate hearing to investigate skyrocketing gasoline prices, Louisiana's Democratic Senator Mary Landreiu revealed that the tax breaks in the energy bill weren't inserted on behalf of giant companies like Chevron and ExxonMobil. Rather, they were designed to protect the much smaller independent producers and wildcatters, many of whom are located in her home state. Congress's intended beneficiary was Little Oil - the petroleum equivalent of family farmers. Although those breaks aren't subject to repeal in the new legislation, the new House leadership is still determined to assail Big Oil.

Pelosi & co. are moving forward with a punitive program that serves no purpose other than to score points against an unpopular industry. A chief proposal will repeal the manufacturing tax deduction Congress passed in 2004, but only for oil and natural gas companies. It will remain in place for all other manufacturers and industries.

Another provision aims to rewrite many of the leases that various oil and gas companies agreed to a decade ago to drill in the Gulf of Mexico. As incentive for them to invest in exploration when oil was trading at $10 per barrel, Congress established a program to waive the standard royalty that companies must pay the government. Generally (though the law is garbled on this point) an "escape clause" should be inserted in the lease agreements, eliminating the waiver if the price of oil climbs above $34 per barrel. For reasons that are unclear - and are the subject of a federal investigation - the Clinton administration officials who drew up more than 1,000 leases in the late 1990s failed to include the escape clause language. Now that many of these leases are finally starting to produce, and oil is trading at well over the $34 per barrel threshold, the government is missing out on a royalty windfall. Some companies have agreed to renegotiate their leases. Others insist they have legally binding contracts that they signed in good faith. The problem will be sorted out in the courts, regardless of the steps taken by Congressional Democrats. It's a major screw-up all right, but the culprit is not Big Oil. It's Big Government.

The Democrats' plan of attacks on the oil majors goes from bad to worse with their notion that the ill-gotten gains should instead be invested in renewable energy research. Democrats are proposing a dedicated fund to look for alternatives to oil and gas. Good luck. The federal government has been subsidizing renewable and alternative energies for decades, with little to show for it. Wind and solar power combined provide just a fraction of one percent of the energy we use. Oil, gas, coal, and nuclear do all the heavy lifting in our energy economy. That's not going to change anytime soon, no matter how much the Nancy Pelosi Congress demagogues this issue.

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