Letter to Mr. Red Cavaney

June 8, 2006
Mr. Red Cavaney
American Petroleum Institute
President and C.E.O
1220 L Street N.W.
Washington D.C. 20005-4070

Dear Mr. Cavaney:

We are writing in response to recent press reports that have mischaracterized the potential effect of an amendment that we offered to the Department of Interior (DOI) appropriations bill. Our amendment, which was adopted by a large bipartisan majority vote of 252-165 in the U.S. House of Representatives on May 18, 2006, would prohibit DOI funds from being used to issue new leases to any company that currently holds a lease that fails to include a limitation on royalty relief based on market price.

As you know, oil companies pay a fraction of the value of the oil and gas produced on public land as a royalty to the federal government. The federal government issues leases that waive royalty payments on deepwater exploration, but which cancel that royalty-free drilling when oil and gas prices rise above a level set by the Department of Interior's Minerals Management Service.
There are currently 56 lessees holding 576 active leases issued in 1998 and 1999 that mistakenly included no suspension of royalty relief based on market price - allowing companies who signed these leases to produce oil on public land without ever paying a dime to the federal government even if the price of oil is at $50, $75, $100 per barrel or higher.

In recent reports, oil industry representatives have erroneously charged that our amendment would either breach existing contracts, or would prohibit so many domestically-based oil companies from purchasing new contracts that it would effectively outsource production in the Gulf of Mexico and elsewhere to foreign companies were the amendment to become law.

Such charges are false and misleading. Under the terms of our amendment, there is a very simple way for any company that currently holds these leases to continue purchasing new leases from the federal government - renegotiate these existing leases to include the same market-based suspension of royalty-free drilling that is in all other leases of this nature issued by the federal government.

Our amendment also does not abrogate any existing contracts. In a memorandum dated May 18, 2006, the Congressional Research Service wrote, "As we stated in our telephone conversation of May 17, there do not appear to be any constitutional impediments to the proposed amendment. Enactment of this amendment would not constitute a taking of existing leaseholders' rights, but would merely establish a new qualification for potential lessees. It has long been recognized that the Government has broad discretion in determining those firms with which it will enter into contractual agreements. The Supreme Court stated the basic rule in Perkins v. Lukens Steel Co.:

The Government enjoys the unrestricted power to produce its own supplies, to determine those whom it will deal, and fix the terms and conditions upon which it will make needed purchases."

Our amendment is, however, designed to provide oil companies with a strong economic incentive to renegotiate these leases that the Government Accountability Office (GAO) has estimated will cost the American taxpayers at least $10 billion over the next 25 years and possibly as much as $80 billion depending on industry litigation.

We would therefore urge your organization to act responsibly and make clear that affected oil companies can escape any impact of our amendment simply by renegotiating with the federal government to ensure that their contracts include the standard and appropriate market-based price caps on royalty-free drilling. Companies can choose to stick with their royalty-free contracts at a time when the market price of oil is at historic highs and American consumers are paying an exorbitant amount of money every time they pull up to the pump, but deciding to maximize their return today will affect their ability to qualify for leases in the future. It is entirely up to them.

Sincerely,
Maurice Hinchey Edward Markey Nick Rahall II Raul Grijalva James Moran

http://www.house.gov/list/press/ny22_hinchey/morenews/060806apiletter.html