Transition Alert - Land Use Issues: Oil & Gas

December 31, 2008

Fourth in a special B&D series on issues likely to be embraced by the next administration.

FEDERAL OIL & GAS DEVELOPMENT

President-elect Obama’s central campaign theme was "Change." Nowhere will change be more evident than in our Nation’s approach to energy and natural resource management. In particular, the management focus for public lands, both onshore and offshore, is expected to shift dramatically as the new Administration and Democratically-controlled Congress emphasize consensus building with citizens groups and States, increased accountability related to the production of minerals on federal lands, and tighter restrictions on drilling and funding aimed at conservation policies. And it will be "deja vu all over again" with regard to the people implementing those changes, as the Obama Energy team draws heavily from the Clinton Administration. In short, though difficult to predict all upcoming changes, one thing is certain -- we won’t be hearing "drill baby drill" at Obama Cabinet meetings.

President-elect Obama may be forced to address quickly certain issues already in play. For example, last summer House Natural Resources Committee Chairman Nick J. Rahall introduced a bill aimed at stimulating production on existing federal oil and gas leases. The "use it or lose it" bill would force oil and gas companies to either produce or give up access to new federal onshore and offshore leases by barring them from lease sales unless they can demonstrate that they are diligently developing the leases they already hold. Congressman Rahall’s bill comes in direct response to perceptions by some that operators are failing to produce on federal lands already open to drilling. This issue could ripen into a monumental battle between conservationists and oil and gas producers.

Management of the Interior Department’s royalty-in-kind ("RIK") program also will likely receive immediate attention. The RIK program allows the Minerals Management Service ("MMS"), a sub-agency of the Interior Department, to market and sell oil and gas taken as royalty on federal leases. In 2007, MMS reported that the RIK program resulted in a $63 million gain over royalties paid in value. But in the wake of recent reports criticizing the program’s oversight policies as well as a scandal in which MMS employees are alleged to have taken gifts from prohibited sources in the oil and gas industry and engaged in other improper behavior, the RIK program is being thoroughly re-evaluated.

Offshore, two issues will have a great impact on our country’s development of energy resources. First, with oil at $147 a barrel in July, President Bush withdrew the executive moratorium on leasing large portions of the outer continental shelf ("OCS"), including the East and West Coasts. And on October 1, the corresponding Congressional ban on leasing in these same areas lapsed for the first time in 27 years. Since then, oil prices have dropped dramatically, and there are many in Congress who would like to reinstate the ban, despite public support for increased domestic energy production. While President-elect Obama has signaled support for opening new areas to offshore drilling, where the new Administration and Congress end up is unclear. "Drill maybe drill" might best describe the current state of offshore drilling.

Second, Congress will likely continue wrestling with efforts by some legislators to recoup billions of dollars in "royalty relief" payments from certain deep water leases. In 1995 Congress passed legislation authorizing MMS to provide royalty relief on oil and gas produced in the deep waters of the Gulf of Mexico from leases issued between 1996 and 2000. As a stimulus to what was then very expensive and technically-challenging production, the legislation waived the royalties that producers would otherwise have been obligated to pay on prescribed volumes of production. In implementing the legislation for leases issued in 1996, 1997, and 2000, MMS specified that royalty relief would be applicable only if oil and gas prices were below certain price thresholds. MMS did not include these same thresholds in the 1998 and 1999 leases. As a result, when the price of oil and gas increased above threshold levels about five years ago, MMS was unable to collect royalties for leases issued in 1998 and 1999. However, the issue now extends to all five years of leases -- litigation challenging MMS’ authority to include price thresholds in the 1996, 1997, and 2000 leases was successful at the district court level and currently is pending at the Fifth Circuit Court of Appeals. In the last Congress, the House of Representatives passed legislation aimed at recouping the billions of dollars in relief provided to offshore producers; to date, these efforts have fallen short in the Senate because of the significant legal and constitutional issues presented by this proposed legislation. But with a new Administration and Congress that will be looking hard for ways to find funding sources for new projects, expect renewed Congressional activity related to this issue.

At the forefront of these issues will be the men and women that President-elect Obama has picked for his energy team. Clinton EPA Administrator Carol Browner will serve as "Head Coach" for energy policy with Steven Chu and Ken Salazar quarterbacking the Energy and Interior Departments, respectively. Lisa Jackson, a Browner protégé and Clinton EPA official, will call the plays at EPA. And in Congress, Senator Bingaman and Congressman Rahall will remain as chairmen of the Senate Energy and Natural Resources Committee and House Natural Resources Committee, while Senator Murkowski and Congressman Hastings replace Pete Domenici and Don Young as the ranking minority leaders on their respective committees. Meanwhile, numerous former Clinton officials such as David Hayes (Deputy Secretary of the Interior) and John Leshy (Interior Solicitor) are currently serving on President-elect Obama’s transition team and will likely have a strong voice in the new Administration.

At Beveridge & Diamond, P.C., we have broad experience in all aspects of the oil and gas industry. Several of our attorneys have previously worked as in-house counsel for oil refiners, natural gas producers, and pipeline companies in a number of different states across the nation and held senior positions with the Interior Department and other federal government agencies that regulate the industry. Our in-depth knowledge and understanding of this industry allow us to solve problems quickly and cost-effectively without the delays and costs occasioned by a "learning curve." As the Obama Administration and Congress implement new energy-related policies, B&D is well-poised to apply our experience to whatever changes may lie in store.

Please call Fred Wagner (202) 789-6041, Peter Schaumberg (202) 789-6043, Peter Gregg (512) 391-8030, or Bill Sinclair (410) 230-1354 for further information.

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