[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DEEP WATER ROYALTY RELIEF: MISMANAGEMENT AND COVER-UPS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 21, 2006
__________
Serial No. 109-219
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
33-391 PDF WASHINGTON : 2007
------------------------------------------------------------------
For sale by Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2250. Mail: Stop SSOP,
Washington, DC 20402-0001
COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of
PATRICK T. McHENRY, North Carolina Columbia
CHARLES W. DENT, Pennsylvania ------
VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont
JEAN SCHMIDT, Ohio (Independent)
------ ------
David Marin, Staff Director
Lawrence Halloran, Deputy Staff Director
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy and Resources
DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida BRIAN HIGGINS, New York
JOHN M. McHUGH, New York TOM LANTOS, California
PATRICK T. McHENRY, North Carolina DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Brady, Staff Director
Thomas Alexander, Counsel
Lori Gavaghan, Clerk
Richard Butcher, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 21, 2006.................................... 1
Statement of:
Hofmeister, John, president of U.S. operations, Shell Oil
Corp.; Randy Limbacher, executive vice president,
exploration and production-Americas, ConocoPhillips Co.; A.
Tim Cejka, president, Exxon Exploration Co., ExxonMobil
Corp.; Gregory F. Pilcher, senior vice president, general
counsel and secretary, Kerr-McGee Oil Corp.; and Paul K.
Siegele, vice president for deep water development, Gulf of
Mexico, Chevron Corp....................................... 48
Cejka, A. Tim............................................ 63
Hofmeister, John......................................... 48
Limbacher, Randy......................................... 55
Pilcher, Gregory F....................................... 70
Siegele, Paul K.......................................... 82
Schaumberg, Peter J., attorney, Beveridge and Diamond, PC;
Geoffrey Heath, attorney, U.S. Department of Interior; and
Milo C. Mason, attorney, U.S. Department of Interior....... 30
Heath, Geoffrey.......................................... 34
Mason, Milo C............................................ 36
Schaumberg, Peter J...................................... 30
Letters, statements, etc., submitted for the record by:
Cejka, A. Tim, president, Exxon Exploration Co., ExxonMobil
Corp., prepared statement of............................... 65
Heath, Geoffrey, attorney, U.S. Department of Interior,
prepared statement of...................................... 35
Hofmeister, John, president of U.S. operations, Shell Oil
Corp.:
Letter dated June 15, 2006............................... 50
Prepared statement of.................................... 52
Issa, Hon. Darrell E., a Representative in Congress from the
State of California:
Letter dated June 20, 2006............................... 5
Prepared statement of.................................... 15
Limbacher, Randy, executive vice president, exploration and
production-Americas, ConocoPhillips Co., prepared statement
of......................................................... 56
Maloney, Hon. Carolyn B., a Representative in Congress from
the State of New York, prepared statement of............... 28
Mason, Milo C., attorney, U.S. Department of Interior,
prepared statement of...................................... 37
Pilcher, Gregory F., senior vice president, general counsel
and secretary, Kerr-McGee Oil Corp., prepared statement of. 72
Schaumberg, Peter J., attorney, Beveridge and Diamond, PC,
prepared statement of...................................... 32
Siegele, Paul K., vice president for deep water development,
Gulf of Mexico, Chevron Corp., prepared statement of....... 84
Watson, Hon. Diane E., a Representative in Congress from the
State of California, prepared statement of................. 21
DEEP WATER ROYALTY RELIEF: MISMANAGEMENT AND COVER-UPS
----------
WEDNESDAY, JUNE 21, 2006
House of Representatives,
Subcommittee on Energy and Resources,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 9 a.m., in
room 2154, Rayburn House Office Building, Hon. Darrell E. Issa
(chairman of the committee) presiding.
Present: Representatives Issa, Watson, and Maloney.
Staff present: Larry Brady, staff director; Lori Gavaghan,
legislative clerk; Tom Alexander, counsel; Dave Solan, Ray
Robbins, and Joe Thompson, professional staff members; Richard
Butcher, minority professional staff member; and Jean Gosa,
minority assistant clerk.
Mr. Issa. I would like to call this hearing to order.
Today the question remains of whether a lease with this
many signatures and counter-signatures is open to being signed
without people knowing it. In other words, can you have a lease
that somebody didn't know that there were inclusions or
omissions with that many people signing it, saying they have
read it, evaluated it and approved it?
But as I call this meeting to order, I would first like to
thank the witnesses for appearing today. Your willingness to
answer questions is an important step in this investigation.
The subcommittee is investigating the absence of price
thresholds in deep water leases entered into during the period
1998 through 1999. The results to date indicate a trail of
gross mismanagement by the Department of Interior.
This irresponsibility is likely to cost taxpayers almost
$10 billion. And I might note that when we started this
investigation, figures escalated from $5 million to $10
million.
In 1995, Congress enacted the Deep Water Royalty Relief Act
to provide financial incentives to companies to produce oil and
natural gas from our deep coastal waters. This came at a time
when oil and natural gas prices were low and the interest in
deep water drilling was lacking.
As an incentive, the act allowed oil and gas companies to
forego paying royalties to the Department of the Interior for a
specific volume of oil or natural gas produced. This would
allow companies to recoup their capital investment before
having to pay royalties. I repeat: the purposes of the royalty
suspension was to allow companies to recoup their capital
investment.
To ensure that companies did not receive windfall profits,
and I will repeat that again, did not receive windfall profits,
the act also provided for price thresholds. In other words, a
company would be allowed to operate royalty-free until either a
certain volume of production was achieved or the market price
of oil or natural gas reached a specific ceiling. These two
provisions are known as volume suspensions and price
thresholds, respectively.
The Interior Department was charged with the act's
implementation. As such, it was to issue a rule devising a
royalty suspension scheme that would impose volume suspensions
and price thresholds. The interim rule was issued on March 25,
1996, by the Interior Department, the rule that was issued on
that date was inadequate. It did not contain price thresholds.
Instead, the final notice of sale contained volume suspensions
and price thresholds, and leases signed in 1996 and 1997
included volume suspensions and price thresholds in the addenda
to leases, meaning in the body of the lease signed by both
parties. Exhibit 1 illustrates final notice of sale, and
exhibit 2 has the lease addendum.
This practice continued until the final regulation was
issued in January 1998. So for those two periods, both parties
signed leases that included the specific language. Again, all
of you, as I noted, saw the earlier amounts of counter-
signatures. As we reviewed the leases, those counter-
signatures, in 1996, 1997, 1998, 1999, and through today, are
typical amount of people who either signed or initialed leases.
For leases issued in 1998 and 1999, the price thresholds
disappeared from the final notice of sale and individual
leases. Instead, these documents referred to a Final Rule, 30
CFR Part 260, regarding the royalty relief program. The Final
Rule was printed in the Federal Register in January 1998. The
bottom line is that this rule only contained volume suspensions
and did not contain price thresholds. In other words, it was
also inadequate.
Had the price thresholds been included in leases in 1998
and 1999, the threshold would have been set at $28 per barrel
of oil or $3.50 per thousand cubic fee of natural gas. I don't
need to do the math for you on what the prices of oil and
natural gas have become.
In a previous hearing before this subcommittee, a senior
career official claimed that employees thought the Final Rule
contained the price thresholds and operated under that
assumption, and that is why there was a lack of price
thresholds in the leases themselves, and they believed that it
should not and did not trigger red flags. How this could have
happened is a mystery, since the Interim and Final Rules never
contained price thresholds. I call your attention to exhibit 4
on the screen.
Every one of these actions survived multiple levels of
legal and bureaucratic scrutiny. In fact, the lawyers who
drafted and approved the interim regulations were the same
lawyers who drafted and approved the final regulations and
every final notice of sale. The terms and conditions in the
leases were to be carbon copies of those advertised in the
final notices of sale.
I heard that this was explained as a case of ``the right
hand did not know what the left hand was doing.'' But it must
be unique that the right hand and left hand were in fact
working on the same computer keyboards and at the same desks in
the Department of Interior Office. I hope we hear a better
explanation today. Exhibit 5 shows the individuals, and the Xs
showing that they were in fact the same individuals involved in
both aspects of this dilemma of the inadequate lease
provisions.
The Department has also testified, under oath, that nobody
noticed the lack of price thresholds until early 2000. In my
prepared statement, it says ``I am extremely skeptical,'' and I
would say that I am beyond extremely skeptical, but in fact
convinced that people did notice that.
The documents suggest that someone noticed the problem and
attempted to fix it, but did it wrongly. The notices of sale
were different in 1998 than they were in 1999. In 1998, sales
notices made reference to 30 CFR Part 260. In 1999, somebody
within the Department changed the language to refer to 30 CFR
Part 203, which contains both volume suspensions and price
suspensions. However, Part 203 applies to pre-1995 leases.
Thus, the change had no effect.
The leases were operationally no different than before the
change of notice of sale. And I would call to your attention to
exhibit 6 on Part 203, where it clearly shows it was pre-
November 1995 leases that it had affected. I would ask you to
also see exhibit 7, the surname sheet. This is the one that I
had up earlier, and for those who are members on the panel,
take note. I have actually never seen anything other than our
founding documents that had quite this many signatures on it. I
would trust that John Hancock read before signing. [Laughter.]
I was hoping to get at least a little reaction from that.
I am well aware that for every decision made by an agency,
there is a corresponding decision memorandum. We have asked for
the decision memoranda concerning the Department's decision
regarding the drafting of regulations, lease sales and lease
approvals. We have not received any memoranda specifically
referencing the exclusion of price thresholds in the
regulations, nor have we received any memoranda regarding the
decision to switch the reference in the sale notice from Part
260 to Part 203.
Again, many people are involved at every step of the
leasing and rulemaking process. Lawyers, experts and
management, at least up to the Assistant Secretary level, are
obligated to review and sign off on every phase.
The fact that nobody raised an issue with the lack of price
thresholds for years leads to one of two conclusions: nobody
reviewed the leases on either side at the Department of
Interior and these many multi-billion dollar oil companies; or
everyone reviewed and knowingly approved of faulty leases and
regulations. Either scenario is unacceptable. Exhibit 8 shows
the number of people involved in the rulemaking and approval
process. Now, if I have ever seen a bureaucratic checklist of
how many people have to look at something, this is a good
example. I wish we had a larger screen, so you could read the
individual names.
Our first panel of witnesses includes current and former
attorneys for the Department of Interior who will help us get
to the bottom of the missing price threshold. Our second panel
represents the oil and natural gas producers who have the most
leases from 1998 to 1999. And I might note, at least one of the
oil companies doesn't have any leases in that period, but has
current leases.
I realize that the companies are expected to maximize
shareholder value. At the same time, shareholders expect
companies to operate on the up and up to avoid surprises that
may affect earnings. I might repeat that as a board member for
a public company. At the same time, shareholders expect
companies to operate on the up and up to avoid surprises that
may affect earnings.
I am sure that at least some oil and natural gas producers
noticed that price thresholds were missing from the final
notice of sale and the first leases executed in 1998. They must
have known that the missing price thresholds would eventually
cast doubt on the validity of the leases. It is difficult to
believe that no one brought this to the attention of the
Government.
My question to the oil companies will be this: If there is
a bank error in your favor, which you immediately notice, do
you bring it to the bank's attention or do you take the funds
and hope no one finds the error, and instead, assemble a legal
team to later claim that the gains are yours to keep? Bear in
mind that the sum we are dealing with here has now risen to at
least $10 billion, and is in fact trust money from the people
of the United States. These royalties are collected on
resources that belong to the American people. The American
people are not getting the return that Congress promised them
that they would get.
I might also mention that just 2 days ago, I was watching
Fox News in the morning. They were talking about a veteran who
received a $100,000 check and didn't return it. They were
talking about him because he was in court being criminally
prosecuted for accepting and depositing a check. Even though it
had his name on it, he was knowingly accepting an amount of
money that he wasn't entitled to. At least that is what the
prosecutor said. And that happens every day in America. As a
matter of fact, it is a very common problem for veterans, that
they receive an unacceptable amount, and when it is discovered,
they stop getting any payments until they are completely made
back up.
The Interior Department's Inspector General's office has
conducted a parallel investigation surrounding the same issues.
They have conducted 27 interviews thus far of attorneys in the
Solicitor's office and present and former MMS officials in the
D.C. area and in New Orleans. They have reviewed thousands of
documents, including 5,000 e-mails and expect to conduct
additional interviews. The IG's office expects to issue a
report in 6 to 8 weeks.
I ask unanimous consent that the letter from the IG
providing the status of their investigation be inserted into
the record, and that the briefing memo prepared by the
subcommittee staff be inserted into the record as well as all
other relevant materials. Without objection, so ordered.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 33391.001
[GRAPHIC] [TIFF OMITTED] 33391.002
[GRAPHIC] [TIFF OMITTED] 33391.003
[GRAPHIC] [TIFF OMITTED] 33391.004
[GRAPHIC] [TIFF OMITTED] 33391.005
[GRAPHIC] [TIFF OMITTED] 33391.006
[GRAPHIC] [TIFF OMITTED] 33391.007
[GRAPHIC] [TIFF OMITTED] 33391.008
[GRAPHIC] [TIFF OMITTED] 33391.009
Mr. Issa. I have one last comment before I introduce the
first panel of witnesses. It is really a public request. I
would ask everyone watching or listening today, and for those
reading this in print who have any additional information
regarding the missing price thresholds in 1998 and 1999, to
please contact the Government Reform Subcommittee on Energy and
Resources, or its staff. I hope that people being aware of this
will help shed additional light beyond that which we will
receive today.
Today our first panel consists of current and former
Interior Department attorneys. They were responsible for review
of the leases and regulations, so they should be helpful in
shedding light on how these errors occurred.
[The prepared statement of Hon. Darrell E. Issa follows:]
[GRAPHIC] [TIFF OMITTED] 33391.010
[GRAPHIC] [TIFF OMITTED] 33391.011
[GRAPHIC] [TIFF OMITTED] 33391.012
[GRAPHIC] [TIFF OMITTED] 33391.013
Mr. Issa. We are pleased to have here today Mr. Peter
Schaumberg, now in private practice with Beveridge Diamond, PC.
He is a graduate of George Washington University Law School,
and we appreciate your being here today. Mr. Geoffrey Heath, a
graduate of the University of Michigan and George Washington
University of Law, and Mr. Milo Mason, a graduate of Harvard
Law School.
Again, I would like to thank you very much for testifying
here today. I will introduce the second panel after the first
panel is dismissed, and I would now yield to the ranking
member, Ms. Watson, for her opening statement.
Ms. Watson. Thank you so much, Mr. Chairman, for today's
hearing.
I understand that today is the second in a series of
hearings on this topic. I want to thank the past and present
employees at the Department of Interior and the oil company
executives who are attending what should be an educational
question and answer session. I hope we can move forward in
finding positive solutions to the oil and gas royalty programs.
The thirst for oil has placed oil and gas companies in a
powerful position. Oil and natural gas are almost like food and
water to Americans. They keep us warm in the below zero
temperatures of winter and they get us to and from work, they
cook our meals and light our homes. In short, we need it to
survive. It has become one of those commodities that we almost
take for granted, until we have to pay exorbitant sums of money
for it.
The American consumer is suffering while the oil and gas
industry is recording the largest profits in America's history.
This is an unacceptable situation. I know that there is an
accounting controversy surrounding the years of 1998 and 1999
that could yield the Government an estimated $20 billion within
the next 25 years due to very expensive omissions in drafting
the leases. This should not be happening, especially in this
bureaucracy.
From our last hearing on this topic, the Department of the
Interior's witness could not establish why, how or at whose
direction the language was removed from the leases. Why is
there an unwillingness to allow fair and accurate exchange of
numbers between oil and gas industry and the Government? Hasn't
the manipulation at Enron taught us anything?
Congress has a duty, we have a trust placed in us by the
American people, the American taxpayer. One of those jobs is to
not allow companies to exploit, let me repeat this, this goes
to the core of my statement. One of those jobs or duties is not
to allow companies to exploit public assets. The alleged theft
that has occurred during 1998 and 1999 is unacceptable and will
be corrected.
With oil and natural gas prices at all time highs,
companies are expected to earn more than $65 billion royalty-
free. Leases without any royalty mechanism are driving very
large revenue losses. Americans deserve an answer to the
currently inexplicable leases issued in 1998 and 1999 that do
not contain price thresholds at all. Good public policy demands
that Congress conduct real oversight, and Mr. Chairman, that is
something that the Congress has not done in the last few years,
good and effective oversight, and protect the taxpayers'
interests.
Now, Representative Markey introduced legislation, H.R.
4749, to prevent any future royalty holidays for the sake of
oil companies. This legislation is designed to ensure that
taxpayers receive the billions of dollars in future royalty
payment they are owed by major oil companies as payment to
drill on public lands. The bill states that if companies refuse
to renegotiate such leases, they are barred from any new oil or
gas leases on Federal lands. I am interested in hearing the
Department of Interior's and the oil and gas industry
officials' comments on this, and to make steps in the right
direction.
So, Mr. Chairman, I again want to thank you for your
diligence and your leadership in bringing this issue before our
subcommittee once again. It is critical that we investigate the
royalty relief mystery, particularly in 1998 and 1999, and
report back to our constituents as to why this occurred. We
should all, both public and the private sector, work to provide
strong leadership and advocacy to our consumers and
governmental agencies.
Thank you so much, and I will yield back my time.
[The prepared statement of Hon. Diane E. Watson follows:]
[GRAPHIC] [TIFF OMITTED] 33391.014
[GRAPHIC] [TIFF OMITTED] 33391.015
[GRAPHIC] [TIFF OMITTED] 33391.016
[GRAPHIC] [TIFF OMITTED] 33391.017
[GRAPHIC] [TIFF OMITTED] 33391.018
Mr. Issa. I thank the ranking member. I would now ask
unanimous consent that Mrs. Maloney of New York, who is on the
full committee but not on the subcommittee, be allowed to sit
in, make an opening statement and remain for any questions.
Without objection, so ordered.
With that, Mrs. Maloney.
Mrs. Maloney. Thank you very much to the ranking member and
chairman for holding this important hearing on deep water
leases entered into between the Department of Interior and
various oil and gas companies. It is absolutely indisputable
that the American taxpayer is losing billions of dollars from
oil and gas extracted from federally owned land--land that is
owned by the citizens of this country. I think by all accounts,
it is terribly, terribly unfair.
The Government Accountability Office estimates that because
the price thresholds were not included in the deep water leases
from 1998 to 1999, the Government will lose approximately $10
billion in revenue. The GAO further estimates that the
Government could lose as much as $60 billion over the next 25
years if the Kerr-McGee Corp. wins its lawsuit challenging the
price threshold set on its leases from 1996, 1997, and 2000.
I hope we will learn today how those contracts entered into
in 1998 and 1999 failed to include price thresholds. What we
have before us today is the Interior Department's Enron. How
could you make such an incredibly large mistake? And even
though the chairman pointed out that numerous people signed the
contract, the lease, obviously the system is broken.
In Enron, we changed the law so that the CEO of the company
has to sign and say, ``yes, I understand the financial
obligations of my company.'' Maybe we need to change the law so
that the Secretary of the Interior has to sign and say, ``I
understand that these leases are fair.'' Maybe we have to move
it to OMB. Maybe we have to have a private contractor come in
and look at it. But we cannot tolerate this type of, I would
say abuse, to the American taxpayer on oil and gas that is
owned by the American people.
And I would say that Director Burton has written a letter
and asked companies to renegotiate voluntarily the leases that
do not include price thresholds. I think that is a good
direction to go into, that is, it is clearly unfair. I would
like to join my colleagues here on the panel in a bipartisan
letter, which we hope every Member of Congress would sign,
asking the oil companies to renegotiate this unfair lease. I
just happened to look at the testimony today of Shell Corp.
In any event, it is obvious that this is an unfair lease,
given the commodities market for oil now. And if both parties
would renegotiate, and they say they are willing to do so, they
say that they are willing to make a change in our 1998 and 1999
leases by considering the addition of price thresholds, I think
that is the right direction to go in. I think we should
advertise to the American people which oil companies are being
fair to the American people. Maybe we can take out public
service announcements.
But I truly believe that every oil company should stand up
and do what's right and renegotiate their leases. I join my
colleague, Ms. Watson, in being a co-sponsor of H.R. 4749, the
Royalty Relief for Americans Consumer Act, which would force
MMS to renegotiate and bar companies who would not renegotiate
from any further leases.
I would also like to hear today from the Department of the
Interior on another point, what plans they have to ensure that
States have the necessary funding to conduct audits on leases.
An amendment that I passed on the Interior Appropriations bill
recently directed $1 million of the overall appropriation for
the MMS to States and tribes for auditing purposes. For several
years, the total funding that the MMS has provided for audit
funds was held static at about $9 million, with no increase for
inflation.
In fiscal year 2005, MMS began cutting allocations to some
States and tribes, while reallocating funds. The Department of
Interior should be working to improve its auditing programs and
I hope to hear what steps are being taken in that direction and
also to make sure that you understand what is in your leases.
I would also be very interested in hearing from energy
companies. I hope that we will hear today that all of them are
willing to go and renegotiate their leases. But I also would
like to hear why they are reporting one price per barrel to
their shareholders, while reporting a separate price to the
Federal Government, from the oil they pay to the Federal
Government in royalties to what they trade with other companies
and report to their shareholders. And I would like for them to
explain why they did not use the same set of numbers in both
cases.
I just want to end that, in a time when the average price
of gas is $3, in some places it is higher, and we are
regrettably and painfully having to cut student aid for college
loans, senior aid, and programs for the poor. We need to really
handle the management of Government better. And to lose $10
billion, because the lease was not appropriately signed and
reviewed, is a national disgrace. It is a scandal, it is a
scandal, it is an absolute scandal. I would call it the
Department of Interior's Enron. And we need to understand how
this happened and how we can make sure it does not happen in
the future.
Thank you.
[The prepared statement of Hon. Carolyn B. Maloney
follows:]
[GRAPHIC] [TIFF OMITTED] 33391.019
[GRAPHIC] [TIFF OMITTED] 33391.020
Mr. Issa. Thank you. I would now ask unanimous consent that
all opening statements be placed in the record. Without
objection, so ordered.
Before I swear in the first panel, I would like to set a
tone for today, and that is that we deliberately had our
Department of Interior panel first, so we could establish
contract activities. Obviously, when we get to the oil
companies, we may very well be getting into contract sanctity
versus intent of Congress. But on the first panel, the primary
concern is intended to be, although Members are free to ask any
questions they want, how did we make so many different changes
in a contract, how did we have defective contracts, at least
from this position, with so many people signing off on them.
With that, I would ask the first panel to rise, and as is a
requirement of this committee, to take the oath.
[Witnesses sworn.]
Mr. Issa. The clerk will take note that all witnesses
affirmed. Please have a seat.
Did you bring any people with you that may be consulting or
providing you additional information during your testimony and
question and answer period? If there is anyone that is going to
be providing assistance to those testifying, I apologize, but
would you please rise and also please take the oath. Now I see
none. So it will be just the three.
We have previously introduced the panel, so we will begin
with Mr. Schaumberg and Mr. Heath and then Mr. Mason. Again,
your statements are in the record, so you may use your 5
minutes over and above your opening statements.
STATEMENTS OF PETER J. SCHAUMBERG, ATTORNEY, BEVERIDGE AND
DIAMOND, PC; GEOFFREY HEATH, ATTORNEY, U.S. DEPARTMENT OF
INTERIOR; AND MILO C. MASON, ATTORNEY, U.S. DEPARTMENT OF
INTERIOR
STATEMENT OF PETER SCHAUMBERG
Mr. Schaumberg. Thank you, Mr. Chairman. I did provide my
biography in my opening statement, but if I may just briefly
summarize, as you correctly noted, I am currently of counsel
with the law firm here in Washington of Beveridge and Diamond,
PC. I retired from the Office of the Solicitor on May 30th of
this year, after almost 31 years of Government service, the
last 25 of which were with the Office of the Solicitor.
With respect to the time period that we are dealing with
here, I held two positions. I was the Assistant Solicitor for
onshore minerals, responsible for managing a branch of
approximately nine attorneys that provided legal advice to the
Bureau of Land Management on its onshore minerals issues
involving oil and gas, coal, other solid minerals under the
Mining Law of 1872.
Since 1997, approximately October, November 1997, I also
was the Deputy Associate Solicitor for the Division of Mineral
Resources, which included my branch of onshore minerals, as
well as the branches of Royalty and Offshore Minerals, and the
Branch of Surface Mining. So I held a dual responsibility.
Between 1995 and 1997, in that 2 year period, in 1995 the
Solicitor's Office was reorganized, to create a new Division of
Mineral Resources. At the time I was appointed as the Acting
Deputy Associate Solicitor, and in the 4-years before that, I
had been the Assistant Solicitor for Royalty, where I dealt
with royalty determination and collection issues, not with
leasing issues. But from 1995 to 1997, the branches of Royalty
and Offshore Minerals were consolidated into one branch under
my supervision.
And then as I said, prior to 1995, for that 14 years, I
worked almost exclusively with the Royalty Collection Program
in the Minerals Management Service.
I would be happy to answer any questions that you or any of
the other Members may have today.
[The prepared statement of Mr. Schaumberg follows:]
[GRAPHIC] [TIFF OMITTED] 33391.021
[GRAPHIC] [TIFF OMITTED] 33391.022
Mr. Issa. Thank you. Mr. Heath.
STATEMENT OF GEOFFREY HEATH
Mr. Heath. Thank you, Mr. Chairman.
I had joined the Solicitor's Office in what was then the
Division of Energy and Resources in November 1983. Since that
time, as a staff and then later in supervisory positions, I
have represented the Minerals Management Services Royalty
Management Program, as it was called most of the time, now
known as the Minerals Revenue Management. The Minerals Revenue
Management was responsible for the collecting, accounting for a
disbursing of the royalties, rentals, bonus payments and other
revenues derived from more than 26,000 oil and gas and other
mineral leases on Federal and Indian lands, including the outer
continental shelf, and enforcing the lessees' royalty
obligations.
In October 1997, in connection with changes in the
management assignments with in the Division of Mineral
Resources, I became the Acting Assistant Solicitor for Royalty
and Offshore Minerals. As supervisor of the branch of Royalty
and Offshore Minerals, I gained my first responsibility for and
involvement in the offshore leasing process. Before that time,
I had not done significant work with the Offshore Minerals
Management Program, and that was not part of my responsibility.
As the Acting Assistant Solicitor and then later the
Assistant Solicitor, since July 1998, I represented both the
Royalty Management Program and the Offshore Minerals Management
Program, and supervised the other staff attorneys within the
branch representing those programs. On May 15th of this year,
in connection with a reorganization of the Division, I was
designated as Assistant Solicitor for Federal and Indian
Royalty, and consequently do not any longer have
responsibilities with respect to the Offshore Minerals
Management Program, except for matters involving financial
related issues.
I have no substantive prepared statement, and would be
happy to answer any questions that the members of the committee
may have.
[The prepared statement of Mr. Heath follows:]
[GRAPHIC] [TIFF OMITTED] 33391.023
Mr. Issa. Thank you. Mr. Mason.
STATEMENT OF MILO C. MASON
Mr. Mason. Thank you, Mr. Chairman.
I don't have anything to add to my biographical statement,
really, other than I was a senior career staff attorney working
on these matters at the time.
[The prepared statement of Mr. Mason follows:]
[GRAPHIC] [TIFF OMITTED] 33391.024
Mr. Issa. OK, then we will begin a round of questioning.
And I will note on exhibit 5, Mr. Schaumberg and Mr. Mason,
both are listed as being involved in both the sale of documents
and in the rulemaking involved before us today. Mr. Heath, I
show you as involved only in the sales, in other words, signing
off on them. My opening question really is to all three of you,
but particularly to the two that were involved in both sides.
Were you aware of the ambiguity, and if so when, between
what the rules were saying and what the contract was saying in
these various periods of time in which you signed the leases?
Mr. Mason. May I go first on this?
Mr. Issa. I think they'll let you go first on each one if
you would like. [Laughter.]
Mr. Mason. Thank you, Mr. Chairman. Maybe I shouldn't.
I did not sign the leases. I did not sign off on the actual
lease document. I did review and sign off as legally sufficient
were the proposed and final regulations on royalty relief
during that time, and also on what we call the proposed notice
of sale, which is basically, a lease sale announcement. The
final notice of sale, which is again the final announcement of
the auction or lease that we would hold in New Orleans, 30 days
after, has to be 30 days before the actual bid opening and
auction.
The leases were issued, and I always assumed they were more
of a clerical duty for the regional director's office to issue
after the lease bids were reviewed for adequacy, and then the
lease documents themselves would be sent to the winning,
highest bidder on the block where the highest bidder would sign
and return the lease to the regional director because they
would want it, and they had to present it in an adequate bid,
which under the statute requires fair value for that tract.
Then the regional director would sign off on that.
I never saw those leases until having to review them before
we presented them to the committee upon your request. It was
brought to my attention some time in 1999 that the lease
addendum that I had thought had been a part of those standard
lease forms that were sent out, I would say clerically, had
been sent out without the lease addendum for the years 1998 and
1999. I was not aware of that until a telephone call, and I
racked my brain from whom it came, but I was surprised.
Mr. Issa. OK. Following up on that, so it is your
understanding that a lease document, the actual, signed
document by the regional director, is pro forma, that in fact
it is to mirror the sales document and notice of final sale,
such that in fact everybody understands that when they get that
lease, that is just something that comes in later on that says,
oh, by the way, we are done with this, go out and drill, and
that in fact, what the lease is going to mean is already
determined before that document goes out, that is why you are
calling it clerical, as I understand it?
Mr. Mason. Yes.
Mr. Issa. OK, and last question, then I will ask the others
to answer substantially the same three questions--go ahead.
Mr. Mason. I am sorry, Mr. Chairman, I guess I should
qualify that yes. Not every aspect of the standard lease form
needs to be in the notice of sale. They become the standard
lease form. They have been reviewed at some point. I think I
did review the earlier language that had been the addendum and
the lease form that were the new deep water royalty lease forms
in 1996, when they were first issued. I don't think I needed to
sign off on them, I just read them and they looked fine and
they reflected the policy choices of my client. And my
signature, or surname, was for their legal sufficiency.
Mr. Issa. Thank you for that. Then what you are saying,
though, is that ultimately the regional director doesn't have
the authority to make up new terms and conditions, that the
lease has to be substantially the same as the terms and
conditions that were part of the bidding process notice of
sale?
Mr. Mason. Yes. I don't think the lease terms and
conditions were delegated to the regional director. They are
signed off on in the lease announcement. What was understood to
be the conditions and terms of the leases were signed off on at
I think the Assistant Secretary's level.
Mr. Issa. OK, so assuming for a moment that the lease,
although in most people's minds it is a binding contract, it is
the deal, but in the business of Government contracting or
Government bidding, in this case, realistically, the parties
often don't rely on that, because they rely on all the terms
and conditions in the bidding process, all the information
there. And this document is to reflect that.
If that is the case, then from the documents sans the lease
agreement, did you believe that there were thresholds in the
notice of sale and the documents that were under your control,
that during the entire period from the time Congress acted,
that there would be a threshold, both for price and volume in
leases that were signed?
Mr. Mason. That is a very good question and a very
complicated question. I would like to answer in a couple of
sections.
Mr. Issa. Absolutely.
Mr. Mason. Certainly, Congress in the Deep Water Royalty
Relief Act mandated the volume suspensions, for a period of 5
years. While we had issued regulations limiting that volume to
the fields or development projects, those regulations were
struck down in a case usually referred to as the Santa Fe
Snyder case. The Fifth Circuit decided that ``the leases''
meant each and every lease, and it was mandated.
Those regulations, I am at this point, 10 years later, I am
not exactly sure whether they, in the interim final rules,
contained price thresholds or not. I was at the time asked
about the authority to put price thresholds into new leases. I
am authorized by Interior to waive some of those attorney-
client privileged discussions that I had back then.
Mr. Issa. Thank you.
Mr. Mason. So I am explaining this to you now with a little
bit of hesitation, because I don't reveal attorney-client
privileged discussions usually.
I rendered a professional judgment that for those 5 years,
the Secretary had authority to impose price thresholds,
although they were not mandated by Congress. So they were not,
since they were not mandated, I mentioned orally, because most
of my legal advice is oral, that they didn't need to be
necessarily in the regulations. They could be in a lease sale
announcement or the lease form on a case by case, lease sale by
lease sale basis.
Especially if they are going to be just for 5 years, or the
client had the choice of putting those price thresholds in the
announced, in the lease sale announcement or the leases. They
chose, I thought, to do that, as a policy choice back in 1996.
And until the telephone call in 1999, when I was informed that
the lease addendum didn't have those things in them, I assumed
the client was putting them in.
Mr. Issa. OK. As I go to everyone else, I will just recap
what I believe I heard, one, that you believe that there was
authority, both from the Congress, both for price and volume
thresholds, that volume thresholds were clear and explicit from
Congress, although interpreted by the Fifth Circuit, and thus
that is now law that it is by lease. But that in fact price
thresholds, although not mandated, were within the authority
and you believed that they were in fact being put in until
1999?
Mr. Mason. Yes.
Mr. Issa. Excellent. I guess now you know why you don't
want to be first. [Laughter.]
Whoever would like to be second, it is not nearly as tough
a position.
Mr. Schaumberg. I would be happy to go second, Mr.
Chairman.
Mr. Issa. Mr. Schaumberg.
Mr. Schaumberg. Would you be kind enough to repeat the
question for me, though? It has been a while since I heard it.
Mr. Issa. Realistically, this is the classic, what did you
know and when did you know it. What was your understanding at
the time that you were involved, and in your case, you were
involved in both the rulemaking and in the lease, or if you
will, the sale portion. So you were aware of what we were
telling the industry to bid on, and you were aware of the
regulations.
So, very similar to Mr. Mason, what were your
understandings of what Congress wanted done, and what was your
belief of what was being done? I won't hold you to Mr. Mason's
statements about leases being, if you will, somewhat pro forma
or clerical, and in an expectation that it was in the lease and
that there was nothing new in the lease that wasn't understood
by the bidders earlier. But if you could comment on that along
the way.
Mr. Schaumberg. Well, let me first deal with the
regulations. As Mr. Mason explained, the price thresholds for
these lease sales was not a statutory requirement. Therefore,
the decision whether to put the price thresholds in the
regulations was a program decision. It was 8 or 10 years ago
that we worked on these regulations.
I don't remember how extensive my involvement was in the
drafting and preparation of those regulations. Because it was a
program decision, I think it would be best to ask the program
what their reason was as to why they decided not to put them in
the regulations.
Mr. Issa. As you are answering that, if you could clarify
what a program decision means for the panel.
Mr. Schaumberg. A decision of the Minerals Management
Service that was not a legal decision of the Solicitor's
office, as to whether to include the price thresholds as a
regulatory provision.
As far as the lease sale documents, you have included as an
exhibit the first page of a memorandum to the Assistant
Secretary. The lease sale packages that came through for review
and surname literally were close to a foot tall in terms of the
documents that were included in those packages. Usually the top
document was this memorandum to the Assistant Secretary that
contained the director's recommendations as to what the terms
of the sale ought to be.
I don't recall what level of review I provided for these
various packages. I can tell you with some fair recollection
that my review was pretty much an executive level review that I
was reviewing, as the Deputy Associate Solicitor. I had other
responsibilities in terms of my branch responsibilities, but I
did have management responsibility for the division. I relied
upon Mr. Mason's review and Mr. Heath's review before I looked
at those packages. And Mr. Mason would have items, if there was
something that he caught.
I generally would at least look through the memorandum to
the Assistant Secretary, because that would highlight any
changes or new terms that were being included in the leases. I
don't know that I did it here, but that was more or less my
practice.
So I don't recall knowing that there were not price
thresholds in these leases until approximately a year and a
half ago, when prices ran up and the Minerals Management
Service was then looking at issuing letters or orders to the
companies advising them that the price thresholds were
exceeded. Therefore there was some discussion as to what form
those orders ought to take. I think that was the first time I
learned that there were not price thresholds in the leases for
these 2 years. That is my best recollection.
Mr. Issa. You get to do cleanup on this.
Mr. Heath. I don't know that I have much to clean up, Mr.
Chairman.
As was the case with Mr. Schaumberg, I did not know that
price thresholds were not included in the 1998 to 1999 leases
until some time after, or in connection with the Santa Fe
Snyder court decisions. My first involvement in review of any
of the lease sale packages was of the first of the sales held
in 1998. Before then, I did not have either personal or
management responsibility for any part of the lease sale
process. My review likewise was of a quite high end, summary
level.
Necessarily, my initial reliance is on someone who has a
lot greater years and depth of expertise than I did. I don't
recall any discussion or mention of price thresholds or
existence, lack of existence or anything from that time. It
isn't anything that I would have been looking for. I had not
seen a lease sale package with the price thresholds in them
before reviewing the 1998 and 1999 packages. It is not
something that would have caught my attention, and it came to
my awareness later.
Mr. Issa. OK. I am going to do a similar recap with the
second to panelists, and then because it is unfair for me to go
on forever, I will allow the ranking member equal time here. If
I understand now better than I did before, these signatures,
and particularly the three of you on this exhibit 7, Mr. Mason,
I realize it was the first part of the year, so January 28,
1998 was actually January 28, 1999, I believe, since the
document is February 9, 1999 date stamped, on exhibit 7. For
Mr. Heath, I noticed that you wrote 1998, but then corrected
it.
I also noticed that next to your name, there are some
other, smaller initials on this document. Would that indicate
that maybe it was staff signed? You initialed, and then signed
for you?
Mr. Heath. No, Mr. Chairman. The other letters are SOL/ROM,
meaning Solicitor/Royalty and Offshore Minerals.
Mr. Issa. OK, so that is a title that you included. Thank
you. And you apparently put 1998 and then realized it was 1999
and changed it.
Mr. Heath. Yes, sir.
Mr. Issa. Which we all do in January every year, I am
afraid. Obviously, I am assuming, Mr. Schaumberg, you got it
last, because you got 1999 right off the bat.
Mr. Schaumberg. Mr. Chairman, I was not last. Kay Henry,
who was the Associate Solicitor, was last. But I did get the
date right.
Mr. Issa. You are only the last in the box, but you are
right. OK, so the fact that they are all signed on the same day
to me begins to indicate, as you said, Mr. Schaumberg, that Mr.
Mason did the functional work, went through the 2 feet of
documents, and then each of you would then initial off, simply
saying ``it was passed before me, perhaps I flipped through the
top of the memo,'' but in fact, you did not go through a foot
of documents. This doesn't indicate that kind of check and
balance. Would that be fair for each of your statements, that
your level of review is not a lawyer getting ready to go to
court, it is simply ``yes, I understand this one is going out,
and it has been checked by the primary person to check it,''
which would be Mr. Mason?
Mr. Schaumberg. For me, that is correct, Mr. Chairman.
Mr. Heath. Yes, that is a fair characterization, Mr.
Chairman. I did not go through the foot of documents.
Mr. Issa. Good. To be honest, that is helping us in seeing
so many signatures and understanding why it might not mean
anything.
Last but not least, apparently in 1999, Mr. Mason, you
became aware from that phone call of the lack of price
thresholds. My understanding from the second two testimonies is
that was not passed on at that time in some formal way or in a
memo of some sort to Mr. Schaumberg or Mr. Heath. I will
include that in a question to all of you as my final, here. Was
there a memo or anything tangible or anything in your
recollection where you were told about this 1999 discovery, for
any of you, or Mr. Mason, did you tell any of them or send them
a memo?
Mr. Mason. I did not send them a memo, to my recollection.
I did, I recall, mention it to Geoff. I don't know if I
mentioned it to Peter. As I report to various other lawyers,
and the management lawyers in the office, it may have been one
of several things I discussed with them that day. Also, I said
I was looking into what to do to fix it, because I know I was
asked about that. I am pretty sure I said on the phone, ``well,
let's get the addendum back in there.'' I don't know what else.
But that is my recollection.
Mr. Issa. OK. I guess Mr. Heath, you remember that
conversation?
Mr. Heath. Truthfully, I don't, Your Honor, but I am not
questioning that it took place. If Milo remembers it, I am sure
it took place, but I don't remember it. I don't question it,
either.
Mr. Mason. May I say one thing?
Mr. Issa. Of course.
Mr. Mason. Back then, the price of oil had, I wouldn't say
flat-lined, but it had been pretty low for a long, long time.
Mr. Issa. For this panel, those were the good old days.
Mr. Mason. It didn't seem like as big a deal as it is now,
for sure, at that time. Because we assumed the prices would
continue on that----
Mr. Issa. You were dealing with sort of like a lease
option. If you don't expect to renew the lease, it isn't a
factor until you start getting to the end of the lease, so to
speak.
OK, I appreciate I have taken a lot of time. Ms. Watson,
your questions.
Ms. Watson. Thank you, Mr. Chairman. Congressman Markey and
several others recently introduced a bill to correct the
royalty problem. The bill would suspend royalty relief when oil
and natural gas prices exceeded a threshold price of $34.71 per
barrel of oil, or $4.34 per 1,000 cubic feet of natural gas.
With respect to existing leases, the bill would require that
Mineral Management [MMS], to renegotiate the leases to include
these price thresholds.
Any company that refused to renegotiate an existing lease
would not be eligible for any new leases for oil or natural gas
on Federal lands. Now, what would be your thoughts about this?
I heard a distinction made between solicitors and programmatic
personnel. Is this something that would go to the program
personnel or the solicitors? And I would like each one of you
to respond.
Mr. Mason. Thank you. I am the lead-off, I guess, again.
Mr. Issa. I guess you get to be the first pitcher for the
whole time. [Laughter.]
Mr. Mason. Let me take a pass at commenting on that,
because I am not in a position to represent the Department on
future legislation.
Ms. Watson. Yield for a minute. Let me just get a
clarification in my own mind, and for the panel. There is a
difference between the program administrators, and those are
the other people, and you, the solicitors, right?
Mr. Mason. Yes.
Ms. Watson. And you are talking about the attorneys who
then go over and do a perfunctory review, is that correct?
Mr. Mason. Yes, I sometimes don't want to do just a
perfunctory review, but yes.
Ms. Watson. Well, you go a little bit below the surface?
Mr. Mason. Right. My review is to render my professional
judgment about what is legal and what isn't sufficiently legal.
Ms. Watson. Exactly. That is what we are looking for.
Mr. Mason. And the program people are policy people, the
Assistant Secretary or the Director of MMS. And they choose
whether to put price thresholds in or not, and whether to
support legislation or not. At the time, I get sometimes a
review of proposed legislation, I will render a legal opinion
about whether it is constitutional, what the policy
implications would be. I don't usually render a personal
opinion about legislation that is pending before Congress.
Ms. Watson. All right. Mr. Schaumberg.
Mr. Schaumberg. As I explained, I am no longer with the
Department. At the time I was there----
Ms. Watson. How does it sound to you? Such a piece of
legislation, how would it sound to you if you were in the
Department still?
Mr. Schaumberg. Well, we had some discussion about that
while I was at the Department. And the privilege waiver from
the Solicitor does not go to those matters. So that would be a
privileged communication. So I believe at this point, without
having a waiver on that matter from the Solicitor, it would not
be appropriate for me to answer as to what my opinion was.
Ms. Watson. All right. Mr. Heath, what do you think?
Mr. Heath. Congresswoman, I would like to reinforce
something that Mr. Mason referred to. Our understanding is that
we were being called in our personal capacity, and not as
representatives of the Department. We don't have authority to
speak for the Department.
Ms. Watson. OK. Mr. Chairman, you know, there is a piece
missing in all of this. We have the attorneys here, some active
and participating now. And we have the companies that would be
affected by policy. But we don't have the programmatic side to
explain some of this.
Mr. Issa. Will the gentlelady yield? That is the reason
that undoubtedly we will have another hearing.
Ms. Watson. Exactly. I am just pointing out, we can't get
any real substantive feedback from this panel, because they are
the guys that come in and see if what we propose is
constitutional or not, and they advise the programmatic people.
They don't come up with the ideas.
So what I would like to hear from in our next hearing are
the people that devise the programs. Because I had a question
here as to why MMS cut the number of auditors. Well, they can't
answer that. The programmatic side can.
Mr. Issa. Sure. I would look forward to another hearing.
Ms. Watson. Yes.
Mr. Issa. If the gentlelady would yield, perhaps I could
take care of the impasse here.
Ms. Watson. Sure. Let me just conclude by saying that I
can't put these people on the spot, because they don't have the
answers to what I really want to know: how do these things
happen. They do the oversight. They do the legal interpretation
of the policies that come from the administration of the
program.
So I am not really blaming them for not having the
information, I understand. We just don't have that piece. I
look forward to our next hearing.
So I don't have any more questions, because they truly
can't respond to my concerns.
Mr. Issa. OK. Thank you. What I would ask, would all the
witnesses, subject to Department of Interior waiving the
specific attorney-client privilege for the question you were
unable to answer, be willing to answer them once that waiver is
granted in writing, so that we do not have to get you back?
Would that be acceptable, rather than having you all come back,
if that is granted?
Mr. Heath. From my perspective, Mr. Chairman, that would be
fine.
Mr. Issa. All I need is a yes, and then we will submit to
the Department of Interior, should they grant that, then the
question could be answered in writing. We wouldn't trouble you
to come back, if at all possible.
Mr. Schaumberg. Well, Mr. Chairman, it is certainly a
complicated question.
Mr. Issa. We would submit the question in writing to you
again anew. I wouldn't ask you to try to answer later what you
heard here today. It would come to you in writing.
Mr. Schaumberg. I understand. I am just suggesting that a
response to a question such as that, it is probably a very
large and complicated constitutional legal question that would
not be easy to respond to.
Mr. Issa. Is the gentlelady interested in the Cliff Notes
or the long answer? [Laughter.]
Ms. Watson. Mr. Chairman, my true opinion, this is kind of
a waste of time, because these are not the guys who initiate
the policy.
Mr. Issa. Then the gentlelady withdraws that. I will save
you that. With that, I have just one final closing question,
and it will be very brief.
Mr. Mason, you had said in the first round that in fact you
didn't believe that the price thresholds should be put into the
regulations, but rather, they should be in the lease agreements
and that you understood it was a policy decision in what was
then the Clinton administration, but in fact you didn't believe
it should be in the regulations. Is that correct? Did we hear
you right?
Mr. Mason. I don't think I said I preferred one way or the
other. The lease terms and conditions can be set forth in the
proposed announcement of the lease sale, and the final notice
of sale. They don't have to be in the regulations to be part of
the lease. When I was asked my professional opinion of which
way to go, I am not sure what I answered, but I must have said
it would be fine to do it on a lease sale by lease sale basis.
They could be more flexible that way, than have it codified in
the CFR. If they did codify it in the CFR, the actual number of
what the price threshold, since the statute grants the
Secretary the discretion on the price of production, they could
choose a different price production than the one that was
originally set for old leases.
Mr. Issa. OK. So if I understand correctly, you were the
person that this decision process--does it go, or doesn't it go
into the regulations--came to, in all likelihood. You believe
that you issued an opinion that it could be done either way,
and that in fact that led to it not being in the regulations
itself, thus allowing for it to either be or not be in
individual leases later granted at individual threshold amounts
that were not determined by the regulation.
Mr. Mason. That is a complex question, too.
Mr. Issa. Actually I was putting words in your mouth.
[Laughter.]
Mr. Mason. I wasn't going to say that, Mr. Chairman. I am
sorry.
Actually, Congress was the first that chose to let the
Secretary decide when or if and how he or she would put in the
price thresholds for these lease sales. It wasn't me.
Mr. Issa. I understand. You are in that wonderful position
that you have to interpret what 435 people in one side of the
house and 100 people in the other might have meant.
Mr. Mason. And then get the Fifth Circuit to tell me what
they truly meant. [Laughter.]
Sometimes, yes. So I just rendered a legal opinion that
whether it was sufficient or OK to put them in the lease forms
or the sale notices or the CFR.
Mr. Issa. I would assume, as my opening statement said,
that there were memoranda, there was some kind of
correspondence, written documents that went with these
decision, thought process, discussions.
Mr. Mason. Not usually. My legal practice is a lot of just
oral correspondence on the telephone and in meetings that were
deciding 18 issues, maybe, and they would say, well, can we do
it this way, and I would say----
Mr. Issa. OK. So my frustration in my opening comment that
we have received no memoranda is because the departments
operate basically orally and without memoranda, that is why we
haven't gotten any correspondence back and forth?
Mr. Mason. Well, we are a couple of floors away from each
other, and a lot of the day to day, at the time, I don't know
if it seemed especially crucial. I don't know. I don't usually
write a solicitor's opinion on matters like this, or put memos
to the record.
Mr. Issa. How about e-mails? I guess I will ask one closing
question related to this particular subject. I am from an era
before e-mails. In my previous Government time, I was in the
military, in the 1970's. We used to call it CYA. We never knew
what it meant, but we had an idea. [Laughter.]
I can't imagine, as a young second lieutenant, not
annotating in my little green book--that you got when you got
your butter bars--things that I was told, so that I would have
them at the time as I remembered them. I can't imagine anything
significant in the thousands of dollars that something wasn't
produced on a standard blank form with a number on it that was
put in the record or submitted to whoever was appropriate, just
to confirm what I had been told. If it was so much as a vehicle
leaving the base, which was an unusual event, potentially,
there was a piece of paper.
So on $10 billion, and maybe it didn't seem like it was
going to be $10 billion, are you saying that assuming the
privilege is waived, we will find no correspondence between
various people that was done in writing, including e-mail?
Mr. Mason. No, I am not saying that, Mr. Chairman. I don't
recall putting any legal opinion in writing at the time. I may
have referred to something in e-mails. The Solicitor's office
no longer has e-mail, since the Cobell case.
I am not positive that there won't be something. But
probably not from me. And quite frankly, you are right, often
memos to the file are done. For the first 15 years of my
Federal career, I kept my own chron file in my drawer of things
I had written myself. The drawer got full and I quit doing
that, because I don't have enough time to chronicle every
opinion I render orally and in different meetings and back to
back things. Maybe I should start doing that more often now.
Mr. Issa. Well, I will tell you, I have five drawers of my
chron file. I probably couldn't find things in there unless I
knew the date, but my assistant would never let me get rid of
it.
How about for the other two? Do you know of any memos from
your recollection, including e-mail type memos, that you did
that we should expect to see coming in time?
Mr. Heath. Not to my knowledge, Congressman. Our daily
practice, just to clarify a little bit, when we give informal
advice on these sorts of questions, certainly if a client
agency wants a written opinion, then we will give it to them.
Back in the era when we did have e-mail, before we were cutoff,
sometimes I would say, can you send me a confirmatory e-mail,
that would be fine.
But a lot of times we will simply get informal inquiries if
it is OK to X or Y. And we will answer those inquiries, but
that frequently does not yield written correspondence. I don't
know of any on this subject.
Mr. Issa. OK. I will close with one last question, and Mr.
Mason, you get the first and the last in this case. Looking
back, had you made a different decision, one in which you said
that price thresholds at a fixed amount should have been put in
the regulation when you made your original decision, had that
gone in the regulation at $28.50 and $3.50, do you believe we
would be here today?
Mr. Mason. I don't think so. No.
Mr. Issa. I will take that as a no.
Thank you very much. I appreciate your being here. With
that, the first panel is dismissed. We are going to take a 5-
minute break and give the second panel a chance to get seated
and set up. Thank you.
[Recess.]
Mr. Issa. This subcommittee will come back to order. Thank
you very much.
Before we begin, I want to again bring everyone's attention
to the first panel, which I think was illustrative of what I
think this subcommittee is looking for. In the first panel, we
were trying to determine who made a decision to have so many
different contracts, how a mistake would happen where, with one
intent of Congress we had multiple different documents,
multiple different rule processes that led to an ambiguity that
has both companies in court today. Obviously the Federal
Government looking for royalty income that was forecasted but
not received.
Our second panel today, which I am about to introduce,
represents, to be honest, the finest brain trust that exists in
oil companies doing business in America today. I am confident
that when it comes to understanding how to find oil and natural
gas, we couldn't have a better selection. More importantly,
when it comes to understanding how this failure affected your
companies, how we should correct it, how you forecast your own
earnings and obligations to the Federal Government, and so we
will begin looking at that. Although the first panel was about
the agency that we hold responsible for the errors, we need
your help, from the private sector, in preventing this from
happening again. Understanding how it affects your company, and
perhaps in how we can together get out of this in a legal and
constitutional fashion, would be most appreciated.
Our second panel today of witnesses includes John
Hofmeister, president of U.S. operations, Shell Corp.; Randy
Limbacher, executive vice president, exploration and
production-Americas, ConocoPhillips; Mr. Tim Cejka, president
of Exxon Exploration Co., ExxonMobil Corp.; Mr. Paul Siegele,
vice president for deep water development, Gulf of Mexico,
Chevron Corp.; and Mr. Greg Pilcher, senior vice president,
general counsel and secretary of Kerr-McGee Oil Corp.
Since I didn't do it the first time, I want to make sure I
get this right. If I could ask everyone that is testifying and
anyone who may give advice or counsel to those testifying to
rise and take the oath.
[Witnesses sworn.]
Mr. Issa. The clerk will please note that all witnesses and
gentlemen behind answered in the affirmative.
Again, we previously have unanimous consent that all your
opening statements be placed in the record. I want to thank
everyone for rushing, in some cases at the last minute, to get
us a good opening statement. Those will already be in the
record. You need not re-read them, although you are certainly
welcome to. I would ask that you stay within 5 minutes. The
first panel shocked me by staying within 1 minute.
And with that, we are going to waive opening statements on
this side and go to Mr. Hofmeister.
STATEMENTS OF JOHN HOFMEISTER, PRESIDENT OF U.S. OPERATIONS,
SHELL OIL CORP.; RANDY LIMBACHER, EXECUTIVE VICE PRESIDENT,
EXPLORATION AND PRODUCTION-AMERICAS, CONOCOPHILLIPS CO.; A. TIM
CEJKA, PRESIDENT, EXXON EXPLORATION CO., EXXONMOBIL CORP.;
GREGORY F. PILCHER, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY, KERR-MCGEE OIL CORP.; AND PAUL K. SIEGELE, VICE
PRESIDENT FOR DEEP WATER DEVELOPMENT, GULF OF MEXICO, CHEVRON
CORP.
STATEMENT OF JOHN HOFMEISTER
Mr. Hofmeister. Good morning. My name is John Hofmeister. I
am the president of Shell Oil Co., the U.S. arm of Royal Dutch
Shell.
Shell is an integrated oil and gas company that is
dedicated to meeting the challenge of growing world demand for
energy efficiently, profitably and responsibly. Shell puts
sustainability, the search for viable new energy sources and
the application of innovative technologies at the heart of how
we do business. We are dedicated to growing the North American
energy supply.
Our commitment is underpinned by a history of investing
billions of dollars every year in the development of future
domestic energy sources and defining new frontiers. Shell is
pleased to testify before the subcommittee today regarding
price thresholds and deep water leases.
Since its inception in the middle 1990's, Shell has been a
proponent of the Deep Water Royalty Relief Act as a way to
encourage investment in the emerging deep water Gulf of Mexico.
The Deep Water Royalty Relief Act provided a great benefit to
the Nation by encouraging the development and exploration of
oil and gas leases by making them more economically attractive.
It was enacted at a time when the uncertainty of the
technology and the size of the capital investment required huge
corporate commitments to make these leases successful and
productive. For example, even in the 1990's, the exploration
and development of these leases required a billion dollar plus
investment. A single exploratory well, not necessarily
productive, involved costs in the $50 million range. This
incentive was successful in attracting capital to the
development of this important source of domestic energy.
Shell is a proponent of price thresholds on deep water
royalty relief. We supported price thresholds on relief when
the act was being drafted, and continue to support them today.
Shell does not believe deep water royalty relief is necessary
in the current commodity price environment. However, if prices
fall, the economics of deep water projects would change and
deep water royalty relief might be necessary again to encourage
leasing in the deep water.
Outer continental shelf leases are not negotiated by
lessees. Minerals Management Services drafts and publishes a
standardized lease form to be used in the outer continental
shelf. A lessee must either accept the lease as drafted or
forfeit the lease and deposit. Therefore, when leases are
awarded, the lessee must execute the lease and return it within
the time specified. There is no negotiation, but only an award
of a lease to the highest qualified bidder. Shell's policy is
to pay royalties due by lease and by regulation.
Shell does not contest the implication of price thresholds
to deep water leases. We are not a party to the litigation on
price thresholds. We paid royalties for deep water leases for
the years 1996, 1997 and 2000, when the price thresholds had
been exceeded.
Shell holds some 73 deep water leases that were acquired in
1998 and 1999 lease sales. Four of these leases are producing.
Minerals Management Services Director Burton stated last
week the Government made an administrative error by omitting
price thresholds in the 1998 and 1999 deep water royalty
leases. Shell stands ready to work with Minerals Management
Services and Congress to address this issue. In fact, Thursday
of last week, Shell sent Director Burton a letter, before I
knew about this hearing, expressing our willingness to make a
change in our 1998 and 1999 leases by considering the addition
of price thresholds. I would like to submit a copy of that
letter for the record.
Mr. Issa. Without objection, that will be placed in the
record.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 33391.025
Mr. Hofmeister. We met with her yesterday to begin those
discussions.
In addition, we have expressed our desire to resolve the
issue to Members of the House and the Senate.
Mr. Chairman, we agree with you that it is time to resolve
this issue. Shell strongly believes in the sanctity of
contracts and would oppose unilateral modification of legally
binding contracts. We do, however, support price thresholds for
Deep Water Royalty Relief Act leases.
Mr. Chairman, this concludes my remarks. I am available to
answer any questions you or the committee might have.
[The prepared statement of Mr. Hofmeister follows:]
[GRAPHIC] [TIFF OMITTED] 33391.026
[GRAPHIC] [TIFF OMITTED] 33391.027
[GRAPHIC] [TIFF OMITTED] 33391.028
Mr. Issa. Thank you, sir.
Mr. Limbacher.
STATEMENT OF RANDY LIMBACHER
Mr. Limbacher. Good morning, Mr. Chairman and members of
the subcommittee. My name is Randy Limbacher. I am the
executive vice president of the Americas for ConocoPhillips.
Prior to my current position, I was the chief operating officer
at Burlington Resources.
I am pleased to appear before this subcommittee this
morning to address ConocoPhillips' holdings in the Federal
offshore oil and gas leases that were issued by the Department
of the Interior during 1998 and 1999, and that do not
incorporate price thresholds with respect to applicability of
royalty relief for deep water production.
Before I get to the core of my statement, I would like to
emphasize that ConocoPhillips' current upstream asset base
consists primarily of the heritage assets of Conoco, Inc.,
Phillips Petroleum Co. and Burlington Resources, three
previously independent companies that have combined over the
past 3 years to create ConocoPhillips. The prior actions or
positions taken by any one of these companies is not
necessarily reflective of those of ConocoPhillips.
In the short time we had available, we conducted a review
of our lease files, and as a result determined that
ConocoPhillips holds interest in 34 leases issued during 1998
and 1999, that do not incorporate price thresholds with respect
to the eligibility for royalty relief for deep water
production. While some of these leases were acquired by one of
our heritage companies at OCS lease sales directly from the
Department of Interior, others were obtained in transactions
with other companies. In addition, ConocoPhillips has
relinquished or transferred to others interest in leases that
its heritage companies acquired during this timeframe.
However, regardless of the manner obtained, the most
important point for this committee's understanding is that none
of these 34 leases are producing oil or gas, and as a
consequence, no deep water royalty relief is presently being
taken by ConocoPhillips. I am aware of the recent controversy
concerning the appropriateness of royalty relief for deep water
production in today's oil and gas pricing environment. However,
this has not been a significant issue for our company, as we
have not been in a position to make use of the incentives under
the 1998 and 1999 leases.
We can say that ConocoPhillips, our current policy is that
we don't believe royalty relief in the current price
environment is justifiable, thus the reasons for the
thresholds. And we are not pursuing such relief. We are willing
to enter into dialog with Interior on these particular leases.
Mr. Chairman, as you might imagine, with the numerous
mergers that we have undergone in recent years to become
ConocoPhillips, our Federal lease holdings have undergone
constant change. The information presented here today reflects
our current lease situation regarding lease issues in the
period of question. I would be most happy to respond to
questions that members of the subcommittee might have relating
to our leasing practices or related subjects. I thank you
again.
[The prepared statement of Mr. Limbacher follows:]
[GRAPHIC] [TIFF OMITTED] 33391.029
[GRAPHIC] [TIFF OMITTED] 33391.030
[GRAPHIC] [TIFF OMITTED] 33391.031
[GRAPHIC] [TIFF OMITTED] 33391.032
[GRAPHIC] [TIFF OMITTED] 33391.033
[GRAPHIC] [TIFF OMITTED] 33391.034
[GRAPHIC] [TIFF OMITTED] 33391.035
Mr. Issa. Thank you.
Mr. Cejka.
STATEMENT OF A. TIM CEJKA
Mr. Cejka. Thank you, Mr. Chairman, Ranking Member Watson.
My name is Tim Cejka, and I am president of ExxonMobil
Exploration Co., global in reach. I am located in Houston and I
am pleased to be here to be involved in this discussion.
Energy continues to be a topic on many Americans' minds,
particularly as we move into the summer driving season. We know
that your constituents need reliable supplies of affordable
energy not only for fuel for their vehicles, but also to run
their businesses, perform their other activities and help them
get through their daily lives. We understand and share their
concern and interest regarding energy supply, so we welcome
this opportunity to respond to your questions.
With respect to the committee's specific issue for
discussion today, the 1998 and 1998 OCS lease sales and how
they were impacted by the Deep Water Royalty Relief Act, I
would like to begin with an overview of what we see as the MMS
leasing process.
As you are aware, the MMS issues leases on Federal offshore
lands for oil and gas exploration and development under the
Outer Continental Shelf Lands Act, as well as regulations
issued to implement that law. All leases issued are subject to
the law and regulations. Before each lease sale, the MMS, after
an extensive review process, publishes a final notice prior to
the sale. The notice sets forth the terms and conditions under
which the leasing for that sale will occur. This was done for
all lease sales in 1998 and 1999.
The 1995 act mandated the leasing during this period to be
done with a bidding system that provides for royalty relief.
Please note that the final regulations implementing the 1995
act were issued in January 1998. I mention this because I wish
to emphasize that all the leases that heritage Exxon and
heritage Mobil entered into with the Government during this
period were within full compliance of the laws and regulations
at that time.
With respect to 1998 and 1999, OCS leases, given our
understanding of the availability of the acreage at that time,
heritage Exxon, heritage Mobil, bidding as separate companies,
were in combination high bidders on 145 leases. To date, we
have traded all or part of our interest in some of these
original leases and formed ventures with other companies on
additional blocks, to elevate our ownership position to 159
originally awarded in the 1998-1999 timeframe.
So far, unfortunately for me, we have drilled three
wildcats, all dry, and are planning to drill a few more over
the next year or so. Because we have yet to discover any
commercial volumes of hydrocarbon on any leases and therefore
no production, we have not taken any royalty relief on these
leases. At the time the leases were issued, the MMS was
adjusting its policy in accordance with the Deep Water Royalty
Relief Act to promote additional activity in the deep water at
a point in time when activity in this portion of the Gulf was
modest, at best. The structure of the lease agreements enhance
the potential reward to the risk if commercial volumes are
discovered, something of which we have yet to do.
As a result of the MMS policy and the Deep Water Royalty
Relief Act, industry has drilled 50 wildcats on the leases from
1998 to 1999, resulting in 15 commercial discoveries, and will
ultimately produce about 1.5 billion oil equivalent barrels,
according to the industry analyst, Wood MacKenzie.
The more fundamental issues underlying the question before
the subcommittee today are the rule of law and the issue of
contract sanctity. First, ExxonMobil adheres to all applicable
laws and regulations with respect to the lease agreements we
enter into with the Government. Second, in the United States
and in all countries where ExxonMobil operates, the issue of
contract sanctity is critical to our business decisions. Any
change of prior year lease terms and conditions would indicate
the U.S. Government does not place a high value on contract
sanctity. If this value is undermined, it may have a negative
impact on the investment climate in the United States.
Since we originally acquired the rights to these 159
leases, we have formed ventures with several companies and it
is unimaginable that we would have to go back to our co-
venturers and tell them that the terms we offered them have
changed. Confidence in the stability of fiscal terms in the
United States is one of several key reasons you have witnessed
a resurgence in activity in the United States.
While the Federal Government, of course, certainly has the
right to change the terms on future leases that it grants on
Government lands, we expect the terms of existing leases to be
honored. Any attempt to revoke or retroactively renegotiate
leases previously granted by the Federal Government we think
would set a bad example and discourage future industry
investments.
As a U.S. energy company that has the scale and financial
strength to make the future investments needed, undertake the
risks and develop the new technologies necessary to provide
Americans with greater energy access and greater energy
security, ExxonMobil wants to continue to work with you and be
part of an energy solution to this problem.
Compliance with all provisions of our regulatory agreements
is of utmost importance to us. In 2005, ExxonMobil made royalty
payments to U.S. Federal and State authorities of $838 million,
and in addition, provided royalty in-kind production volumes of
6.6 million barrels of oil and 14.8 million cubic feet of gas.
I would like to conclude by stating how proud we are of the
recognition we have received for our leadership in the royalty
arena. Just since 1998, we received the Department of
Interior's Safe Operations and Accurate Reporting [SOAR], award
four times, including 2005. The SOAR award is given to the OCS
lessees who demonstrate excellence in operational safety and
financial reporting.
We have also received the Mineral Revenues Stewardship
award twice since 2003. The Mineral Revenues Stewardship award
recognizes companies with outstanding records for low error
rates, timely payment and responsiveness to compliance and
enforcement requests and orders.
Thank you for your time and consideration for these
hearings.
[The prepared statement of Mr. Cejka follows:]
[GRAPHIC] [TIFF OMITTED] 33391.037
[GRAPHIC] [TIFF OMITTED] 33391.038
[GRAPHIC] [TIFF OMITTED] 33391.039
[GRAPHIC] [TIFF OMITTED] 33391.040
[GRAPHIC] [TIFF OMITTED] 33391.041
Mr. Issa. Thank you, Mr. Cejka.
Mr. Pilcher.
STATEMENT OF GREGORY F. PILCHER
Mr. Pilcher. Mr. Chairman and members of the subcommittee,
I appreciate the opportunity to be here today. My name is Greg
Pilcher, and I am senior vice president, general counsel and
corporate secretary of Kerr-McGee Corp.
My company, Kerr-McGee, has invested over $3.5 billion in
deep water operations in the Gulf of Mexico, including over
$450 million in bonuses and rentals to the Government. This
year, we budgeted approximately $650 million for the deep water
Gulf, and we continue to do our part to help expand the supply
of energy products for the American people.
I would like to begin briefly with the act itself, which
was intended to promote investment in the deep water Gulf, and
help reduce our dependence on foreign oil. The deep water Gulf
is a challenging environment. We operate in waters up to a mile
deep, 100 miles from land and face annual threats from
hurricanes. Each project entails significant risk and requires
the investment of tens and sometimes hundreds of millions of
dollars.
When a company hits a dry hole, which happens much more
often than not in the deep water Gulf, industry absorbs the
loss. There is no refund of bonuses paid to the Government and
no revenues from production. These projects are long term
investments with a time horizon well beyond the cyclical ups
and downs in prices.
Now, a decade later, it is evident that the act has been an
enormous success. Since 1995, industry has drilled almost 1,000
exploration wells and announced more than 125 discoveries
there. Deep water production is up dramatically. Government
revenues from upfront bonus payments from 1996 through 2000
increased by $2 billion. Tens of thousands of American jobs
have been created.
When we are successful, royalty relief under the act for
initial volumes helps us recover our massive investment, as
well as offset our losses for failed projects. Of course, once
production from a deep water lease exceeds the minimum volume,
we pay royalties at the full rate.
Without the incentives of the act, we never would have made
the decision in the 1990's to invest billions of dollars in
these projects. The decision looks like a simple one now, given
high prices. But at the time of the decision, the energy
industry was struggling and was very reluctant to make
substantial investments in exploration. It would be unfair and
unwise for Congress to take any action that would change the
rules established at the time the investments were made.
Now I would like to turn to the leasing process. The key
point here is that the terms of offshore leases are not
negotiated. The form of the lease, including its royalty
language, is dictated by Interior, and those terms are not
negotiable. Those terms, however, must comply with the law and
the lease itself states that it is governed by then-existing
law.
The only decisions for companies in the leasing process are
whether to bid for and how much to bid. The only part of the
lease that is determined by the company is the size of the
bonus offered in the competitive auction. Thus, there were no
negotiations on the terms of the leases that are the subject of
today's hearing. And I am not aware of any discussions between
Kerr-McGee and Interior about lease terms before the issuance
of the leases in 1998 and 1999.
With regard to the absence of price triggers from the 1998
and 1999 leases, Kerr-McGee believes that Congress did not give
Interior authority to include price triggers in any leases sold
during the 5-year period after the act. In short, we don't
believe that the absence of price triggers from leases awarded
in 1998 and 1999 was a mistake. To the contrary, the absence of
price triggers was necessary in order for those leases to be
consistent with the law.
We think this is clear because: first, from the act itself,
which mandates the suspension of royalty on certain minimum
volumes specified by Congress for the leases in question;
second, from the legislative history of the act; third, from
the Federal court decision, which held that Interior does not
have discretion to put conditions on the royalty relief
specified by Congress; and fourth, from Interior's own
regulations, which do not provide for price triggers on the
leases in question.
Ultimately, the courts should decide whether we are right
or wrong, and of course, we will honor whatever decision the
courts make.
In conclusion, we believe the act should be recognized as a
success, even though the act has only just begun to bear fruit
to provide important new domestic energy sources. Regarding
discussions, and as I have said to Members of Congress, we have
had discussions with the agency in an effort to resolve our
dispute, and we remain willing to discuss potential
resolutions.
Mr. Chairman, thank you for the opportunity to testify. We
stand ready to work with the subcommittee as you continue your
investigation of this matter.
[The prepared statement of Mr. Pilcher follows:]
[GRAPHIC] [TIFF OMITTED] 33391.042
[GRAPHIC] [TIFF OMITTED] 33391.043
[GRAPHIC] [TIFF OMITTED] 33391.044
[GRAPHIC] [TIFF OMITTED] 33391.045
[GRAPHIC] [TIFF OMITTED] 33391.046
[GRAPHIC] [TIFF OMITTED] 33391.047
[GRAPHIC] [TIFF OMITTED] 33391.048
[GRAPHIC] [TIFF OMITTED] 33391.049
[GRAPHIC] [TIFF OMITTED] 33391.050
[GRAPHIC] [TIFF OMITTED] 33391.051
Mr. Issa. Thank you.
Mr. Siegele.
STATEMENT OF PAUL K. SIEGELE
Mr. Siegele. Mr. Chairman and members of the subcommittee,
on behalf of Chevron, I wish to express my appreciation at
having the opportunity to appear here today to discuss the
Department of Interior's Deep Water Royalty Relief Program.
As vice president, deepwater exploration and projects, my
job responsibilities include looking for new sources of oil and
gas in the deep water Gulf of Mexico. My previous position was
General Manager for Deepwater Exploration.
Chevron participates at every stage of the MMS Gulf of
Mexico leasing program. As to lease sales, Chevron uses sale
notices to determine on which tracts it will bid for
exploration. Importantly, Chevron and other bidders are not
able to negotiate lease terms. Rather, we submit upfront sealed
bonus bids. The MMS evaluates the high bids for adequacy, and
if deemed acceptable, the MMS prepares the lease, along with
its addenda and stipulations.
Successful high bidders must execute the leases as drafted
by the MMS or forfeit their deposits, 20 percent of the bid
bonus. Once finally executed, leases are binding contracts.
Deep water leases give exploration rights, but in most
cases, no oil or gas is found before their term expires, and
the leases revert back to the MMS. Deep water exploration is
costly. Over the past 10 years, Chevron has spent in excess of
$3 billion in deep water exploration costs.
When oil or gas is discovered, significant additional
expenditures must be made to build producing facilities. For
example, Chevron and its partners are spending $3.5 billion to
develop one of its recent Gulf of Mexico discoveries expected
to come on production in 2008. Once production from any lease
begins, Chevron pays royalties as the oil and gas is produced
and sold and Chevron is one of the Federal Government's largest
payers. In 2001 through 2005, Chevron paid the MMS in excess of
$2.8 billion in Federal royalties.
Turning to the chief question which this subcommittee seeks
to answer, Chevron has the following understanding regarding
the omission of price thresholds from the leases sold in 1998
and 1999. After the first lease sale in 1998, Chevron
questioned MMS' regional office in New Orleans regarding the
apparent omission of thresholds. They indicated they believed
the thresholds were incorporated in the leases through a
reference to the regulations governing royalty relief. Some
time after the thresholds were re-introduced in 2000, the MMS
indicated to Chevron that an oversight had in fact occurred,
and that the 1998 and 1999 leases did not have thresholds as
part of their terms.
Chevron has relied on the terms of its 1998 and 1999 leases
in making investment decisions. When Chevron enters into a
contractual arrangement with the Federal Government, or with
any other partner, Chevron honors its contractual terms.
Chevron expects the same of its counterparts.
Chevron understands that in the very near future, the MMS
will be sending letters to Chevron, and to other companies,
requesting meetings to discuss the absence of price thresholds
in these leases. Chevron has great respect for the MMS. If
requested, Chevron will meet with the MMS to discuss the 1998
and 1999 leases, and Chevron will seriously consider any
proposals the agency may make.
Again, on behalf of Chevron, I wish to express our
gratitude for being given the opportunity to appear here today
and to discuss our views on deep water royalty relief. I would
be happy to answer any questions you may have.
[The prepared statement of Mr. Siegele follows:]
[GRAPHIC] [TIFF OMITTED] 33391.052
[GRAPHIC] [TIFF OMITTED] 33391.053
[GRAPHIC] [TIFF OMITTED] 33391.054
Mr. Issa. Thank you. And again, I want to thank the panel
in these few minutes giving us more candid information about
your understanding than we have gotten from the Department of
Interior in months of work. Your candor is important to us, and
as we go through the questions and answers, if we continue this
way, this will be the most fruitful of all panels we have yet
had before this committee.
Mr. Siegele, you said that in 1998, your company contacted
the Department of Interior when you noticed that the thresholds
were not in the body of a lease that you received, is that
correct?
Mr. Siegele. We contacted the regional office of the MMS in
New Orleans. That is correct.
Mr. Issa. Who was that at the regional office? Do you have
records of that?
Mr. Siegele. I don't know. I was not personally involved.
Mr. Issa. But it was in writing? Is there a correspondence
trail?
Mr. Siegele. It was a meeting. And I could provide the
names of who attended in Chevron, but I am not sure who
attended at the MMS.
Mr. Issa. That would be very helpful, if you could provide
those names, that would allow us to followup in hopefully a
less formal manner.
At that time, your company was informed that these were
going to be not in the body but in the rulemaking. But that
still begs the question, if you recognized that they weren't
there, when did your company become aware, between that and
2000, that you might not have to pay, even if the price went
above a certain level?
Mr. Siegele. It would have been after the price thresholds
were re-introduced in 2000, maybe even 2001.
Mr. Issa. Well, then, I have to ask this question, because
I think it is extremely important, when your company, when
Chevron was making their analysis of what you were going to
pay, what the value of these leases were and so on, you assumed
you were going to pay on price thresholds at that time. So it
didn't, and I don't want to put words in your mouth here, but
it didn't affect your decision process. The 1996, 1997, 1998,
1999, 2000, these were all the same from a standpoint of how
you would work your relationships, your contracts, and more
importantly, where you choose to invest?
Mr. Siegele. Yes, I think this is a critical piece. There
are two very different periods of investment. So what you said
is correct for the leasing decisions. That is the amount of
bonus that we were going to pay to secure the lease. That is a
relatively small investment decision, compared to when we are
going to drill the well, or more importantly, when we are going
to invest the development dollars upon success.
So there are various stages of investment decisions. It is
important to segregate out the early understandings, when we
are making the bids, from later understandings, when we are
making big investments.
Mr. Issa. So if I understand correctly, up until 2000, the
understanding was that they were all the same. Starting in
2000, would it be fair to say that the leases signed in 1998
and 1999 now had more value, because in a quickly spiking up
energy market, these offered you the ability to take natural
resources it found at a less total cost?
Mr. Siegele. I think it is correct to say that they had
more value. It would be not correct to assume in 2000 that
prices were spiking up. Prices have really only spiked up in
the last year, year and a half. So in 2000, prices were
probably at $30 a barrel.
Mr. Issa. But would it be fair to say that today, when you
are choosing where to drill, you are drilling in the 1998 and
1999 leases, versus the ones that have thresholds? In other
words, it is a better return on your investment if you find
resources in those areas in which you get X amount of, in this
case natural gas, before you pay? They are just simply better
leases to you.
Mr. Siegele. That is correct.
Mr. Issa. And at the time you were bidding, though, you
didn't know this. So you bid as though they had a threshold?
Mr. Siegele. That is correct also.
Mr. Issa. OK, so it was, oddly enough, a windfall due to a
clerical error?
Mr. Siegele. I wouldn't characterize it as a windfall.
Mr. Issa. Well, you wouldn't have when you bid it. But
today, I am assuming you would consider it a windfall to find
out you had 2 years worth of leases that you didn't bid any
higher for, you didn't pay any more for, but they are going to
generate more revenue if productive.
Mr. Siegele. What I would say is at the time of the leases,
no one envisioned $70 oil. So it is important to put the
decision in the perspective of the oil price of the day and
what we are facing today. The important thing for us is that we
honor the contracts and we understand we are in a different
situation today, and we are willing to them the MMS about that.
Mr. Issa. I appreciate that, and I appreciate the
willingness of many of the companies to proactively say, ``we
want to work our way through a clerical error.'' I also hope
that all of your companies will appreciate that the United
States is built on a body of law that says we do honor
contracts. In fact, although there is the question of whether
or not the contract says one thing or not, this committee, and
I believe all aspects of the Federal Government, wants to be a
role model for the world that in fact we do not arbitrarily
change contracts simply because the price of oil goes up. We
have seen that in other parts of the world. We see it going on
today. I for one, believe that no one in Government wants to
renegotiate, simply because prices went up. Hopefully that is
something that your companies rest assured that when dealing in
the United States, that will never be a concern, although I am
very aware of some of the countries where it not only is a
concern but a reality.
Back to the question, though, of 1998, 1999, because of
your experience, would you say that had you known, in 1998 that
you didn't have price thresholds, that it would have had some
value based on the what-if scenario? Remember, the thresholds
were $28.50. This was not an unreasonable expectation that we
might inch above $3.50 for natural gas, because that was
certainly forecast, that would happen, or that oil could once
again get above the threshold that might be below $70, but
certainly above the $28.50 that was in the other contracts.
Mr. Siegele. Are you talking about 1998 specifically?
Mr. Issa. If you were bidding in 1998 and knew that there
were contracts over here that had thresholds and contracts over
here that didn't, and you were going to bid two squares next to
each other, would you have bid a different price for that
value?
Mr. Siegele. It is a bit speculative, my answer, but I
would say probably not. In 1998, oil was at $12.50 a barrel,
and companies like mine were scrambling to stay in business. So
it was difficult to envision at that time how high prices might
be today.
Mr. Issa. OK, as I did in the first panel, and all of you
were here for hat, I would summarize and say, as the first two
panelists said, that if prices went so high, that the value
went two, three, four times as high, it never concerned you
that you might not get royalty relief, because at that point
you wouldn't need it. In 1998, looking forward, if somebody had
said, what if natural gas triples or what if oil goes to $70 a
barrel, you would have said, well, then we don't need royalty
relief, correct?
Mr. Siegele. I think it is important to come back to, in
1998, that is one thing. Subsequent decisions have been made up
until today based on the contracts and how we understand the
contracts. And the 1998 decisions were, relatively speaking,
minor investments compared to the investment decisions we are
facing today.
Mr. Issa. I very much agree with you.
Before I yield to the ranking member, Mr. Hofmeister and
Mr. Limbacher, you both indicated that, if I understand
correctly, that this is something that you believe that between
your companies and MMS that an understanding similar to what I
just said with Mr. Siegele, you would be able to say, ``you
know what, we are making enough money now that we are perfectly
happy in future development of some of these wells that aren't
even yet developed.'' You would be willing to have those
thresholds in, or believe that since it was bid, believing they
were in, that in fact that could be negotiated with MMS. Is
that a general understanding, that your companies would hope to
be able to do that, outside of any court involvement or
congressional involvement?
Mr. Hofmeister. The important principle to us, Mr.
Chairman, is that we have and we will continue to support the
Deep Water Royalty Relief Act. We believe it is a sound piece
of law, and so it is a basic principle to us.
Second, given the sanctity of contracts, we would expect to
reach a mutually agreeable way forward. Those are the
discussions that we have entered into.
Mr. Issa. I appreciate that. Mr. Limbacher.
Mr. Limbacher. I believe my comments would be similar. We
do agree that in this price environment, that we don't require
royalty relief to justify the development of such projects. We
are willing to enter into a discussion. When you say
renegotiation, we just need to know what that proposal looks
like and understand all the pieces, rather than just make a
blanket statement that we are going to do this or that.
Mr. Issa. Of course.
Mr. Limbacher. We do have business partners, and a lot of
these leases that we need to just make sure that are not making
a comment, that we are not able to carry out later on due to
those dealings or create another legal issue with another party
as a result. But the answer is, we are certainly willing to
enter that dialog based on those facts.
Mr. Issa. Right. And hopefully, if I used the word
renegotiations, I apologize. My intention was to say that, to
the extent that your companies support the concept that there
was a clerical error made that at the time of bidding, most
companies didn't understand there wouldn't be thresholds.
However, you may have acted in good faith and you may have
contractual obligations that make it to your detriment. You
have acted to your detriment potentially in later contracts,
that clarifying or clearing up a clerical error is not as easy
as simply putting it back into the contract, because you have
acted on it.
So my intention of talking about the meetings is that those
meetings are good faith meetings to deal with the problem of
what now appears to be a fairly significant clerical error that
has financial impact. But this Member, and I think, I'll speak
a little bit for the ranking member, we are not trying to void
contract sanctity. That would be the last thing that I think an
American Congress would ever do.
Mr. Cejka, your position was slightly different in your
opening testimony. Would you clarify how you view engaging with
MMS as to these 2 years?
Mr. Cejka. Yes. I go back just a bit. Similar to the
conversation from Chevron, we take a look at the royalty
aspects, all the fiscal aspects of a contract at the time we
bid and at the time we decide to drill a wildcat well, and then
again when we are about to make a development decision. And at
that time, 1998, 1999, as best I can determine in talking to
people who were active in that area at that time, we assumed,
maybe with good intent, that the MMS intended to leave them
out. We noticed they were out.
But we also noticed activity in the Gulf was at a very low
point. We assumed they were creating an additional incentive.
So when we bid on those tracts, we bid with the understanding
that they were not, the price thresholds were not in. Did we
question that? No. And much like my associates have said, it is
not a negotiation. MMS hands you a form and you agree or you
don't get to play the game.
Now, today, what would we do today? As with any good faith
effort, we are always willing to meet with the MMS, with any
other branch of the Government, and discuss issues. We, as my
other members have said, are very concerned about contract
sanctity. But working with the Government is, I think, our
duty, and we would be happy to participate in discussions.
Mr. Issa. Excellent. So if I understood you correctly, you
clearly understood it, thought it was an incentive, which I
think is different than any other testimony we have had so far.
It certainly was quite an incentive. Did that induce you to
bid, or did that actually, in your opinion, raise what you were
willing to bid? Did you bid higher as a result, in your
opinion?
Mr. Cejka. To tell you the truth, neither. Going back in my
memory, the biggest issue we had with the deep water was
geologic risk. We were bidding our tracts as to the
favorability of the geologic setting. We thought as any piece
of a fiscal package is, that was a good thing.
Did it encourage us to bid more? No, I'd say it was in our
minds, but what we really bid was geologic risk. Now, that
would impact us in the future, if we had to make a decision and
we were on a marginal development. Would that help a marginal
development come on production? We would consider it very
seriously then.
A big discovery that is overwhelming may not need the help.
A marginal discovery that could add volumes for U.S. citizens
might not get developed without some relief. So that is how we
would have done that analysis. First, geologic risk. Then are
the terms acceptable, then we would have bid.
Mr. Issa. I see. So you picked based on your belief that
you would come up with, I guess they would be wet holes if they
are not dry holes. OK, well, that is good.
Mr. Cejka. Unfortunately, my track record is three dry
holes. So I hope the next three I drill will not be the same.
Mr. Issa. I have been going to Las Vegas for over 25 years,
and--no, I did it for business. [Laughter.]
The only reason I can say I came back with oil is that I
went to the show and sold my product. I understand that there
are many places in which you can have those kinds of odds, and
Las Vegas probably offers better odds than drilling in deep
water.
I am interested in Exxon, specifically, you recognized
immediately that these thresholds were not there. You believed
that they were intended not to be there. Do you have written
documentation that is timely in that, either as to meetings or
correspondence, either within the company or to Department of
the Interior or any part of U.S. Government that would help
illuminate that you in fact recognized it and acted on it?
Mr. Cejka. The only communication of a written form we have
with the MMS was actually quite I'd say minor and technical. We
were confused by the definition of field, which as you
understand later was corrected by the court.
Mr. Issa. The Fifth Circuit did a great job of correcting
that understanding.
Mr. Cejka. So the one formal communication we had with the
MMS was, please clarify that definition. So it was a very
minor, technical question.
Internally, I am not sure that there is a written document.
The review process is the manager of the area would express an
intent on fiscal terms, whether they were appropriate or not
appropriate. That person may or may not have included that in
their actual presentation package. We would be happy to look.
Mr. Issa. I would appreciate if you would look for it.
I might note that in 1996, March 1996, taking from one of
your correspondence, it says, ``only the product that receives
a price that exceeds the ceiling price should have royalty
relief suspended. All tracts in upcoming sales are eligible for
royalty relief, as stated in the law, the ceiling price only
applying to existing leases.''
Unfortunately, of course, that is prior to this thing that
it appears as though your trade association and each of your
companies in various ways, and I am just citing yours, because
we are on that subject, in 1996, your companies expected the
Royalty Relief Act to have triggers for price in addition to
volume.
OK. Mr. Pilcher, I have gotten everybody else but you. I am
very interested in your bidding process, what you thought was
in the act. Did you believe the act would have price
thresholds? Did you bid based on price thresholds and so on? If
you could sort of echo some of your colleagues as you see it.
Mr. Pilcher. Sure, I will try to.
As I said in my testimony, we don't believe that there was
a clerical error or any other kind of error involved in
connection with the 1998 and 1999 leases. To the contrary, we
think the 1998 and 1999 leases, and specifically the absence of
the price trigger or price threshold in them reflects precisely
what Congress had done when it passed the Deep Water Royalty
Relief Act back in 1995, and that the absence of those price
triggers was simply the manifestation by the Department to do
exactly what Congress had ordered the Department to do through
that act.
We think the errors were in the other leases, in the prior
years, when those price triggers were included. We think the
law was clear at the time Congress enacted it in 1995. We think
it remains clear today. I think that is consistent with the
regulations and the rules that I heard the first panel talk
about in terms of them, consistent with the act, not including
price triggers. I think what has happened is the Secretary has
effectively usurped Congress and taken authority Congress did
not grant the Secretary for that period in question, for that 5
year period, when the Secretary sought to include price
triggers in those leases.
Mr. Issa. OK, so let me see if I can understand. Your
company, which is by far the premier deep water drilling
company, as I understand it, with all due respect to the
others, numerically you are very, very active, and it is the
biggest part of your portfolio. Some of these other companies
are involved in much broader, different areas. But this is
really what Kerr-McGee does.
And let me understand, are you an API member?
Mr. Pilcher. We are a member of API, that is correct.
Mr. Issa. Are you aware that they published clearly an
understanding, and of course they were part of writing the
legislation, that there would be price thresholds?
Mr. Pilcher. I know the API publishes a lot of things and a
lot of good things. I am unfamiliar with the specifics of any
particular one.
I think I heard you or one of the witnesses talk about the
applicability of price thresholds to existing leases. If that
is what you are referring to, I think the concept of existing
leases is a term of art under the act that applied to leases
that were in effect prior to the enactment of the act in 1995.
Mr. Issa. We were actually citing, among others, the
American Petroleum Institute's document dated April 8, 1996, in
which they say, ``for existing leases,'' and then it says, and
this is bolded for me, ``MMS should lift the suspensions only
for products whose price ceilings have been reached.'' It
appears as though they were anticipating this continuing,
because they were involved in the rulemaking at this time, they
were proposing this into the rulemaking.
But let me ask you, you received leases in 1996, 1997,
1998, 1999 and 2000, is that correct?
Mr. Pilcher. Yes, sir, that is correct. I am not sure if we
received leases in every one of those years, but we probably
did.
Mr. Issa. OK. So in 1996 and 1997, those leases
specifically had price thresholds in the body of those lease
documents that your company and Department of Interior signed?
Mr. Pilcher. Well, not quite. They had threshold or price
trigger provisions that were discussed variously by different
people, not in the main body of the leases, but in the addenda.
Mr. Issa. OK, they are in the addendum. But that is
considered, that is the lease.
Mr. Pilcher. Absolutely. It is part of the lease. It is
just not the main body of the lease.
Mr. Issa. That is correct. When I lease out one of my
commercial buildings, the template that shows what the county
considers to be the lot is separate, but we clip it in there
and everyone understands that when you figure out where your
parking spaces can be, it is based on that.
So you signed those in 1996 and 1997. There wasn't any
duress, was there?
Mr. Pilcher. On signing those leases?
Mr. Issa. Yes.
Mr. Pilcher. No, there was no duress.
Mr. Issa. And so you would expect that, contract sanctity
says that you live up to what the lease says?
Mr. Pilcher. I absolutely believe in contract sanctity. As
we have discussed, this is an auction process. The leases
themselves are not negotiable. The only decision we, the
companies, make in this process is whether and how much to bid.
The leases are dictated by the Department as a matter of law.
The guiding principles that apply to the Department are the
authority that is granted to the Department by the Congress. As
a matter of law, that is how it works.
But in this case, in particular, the fact that the law, as
enacted by Congress, governs these leases, is recited in the
leases themselves. The leases themselves say they are subject
to the law. And we believe the law is clear. We think it was
clear in 1995 and we think it is clear today.
Mr. Issa. I appreciate that. In 1996, 1997, 1998, 1999,
2000, to the extent that you signed leases, and at least in
1996 and 1997 it was very clear the thresholds were there.
Starting in 2000 it was again very clear, when did you first
correspond in writing, in a legal format, since not only you
were an attorney, but these were big dollars, it is done in a
very legal, reviewed process, when did you first say to the
Department of Interior, yes, we have signed this lease, but no,
we shouldn't have to pay this if price thresholds are not
reached--or reached?
Mr. Pilcher. As I mentioned, it is an auction process, so
we didn't negotiate----
Mr. Issa. No, no, and I understand that. But you signed
leases that had provisions you believed were not correct, based
on intent of Congress. When did you first tell the U.S.
Government that you had signed these documents but in fact, you
did not intend to pay royalties if prices reached a certain
point? When did you alert the Government that in fact this
provision was invalid, in your opinion?
Mr. Pilcher. The first occasion we had to do that, although
I don't know the precise date, would have been promptly after
the Government notified us that it intended to actually enforce
a provision of the lease we thought was improper and was
inconsistent with the act. I just don't know the precise date,
but it would have been right after that. It would have been at
a time after prices had come up.
Mr. Issa. OK. So basically from 1996, whether it was in the
document, whether there was a defect or not, from 1996 through
2004, you didn't intend to pay if the price of gas went up. You
intended to rely on your internal, quiet opinion that you had
signed something which you believed was unenforceable and you
would deal with it if it happened. In the meantime, you would
say nothing, similar to my example of receiving these dollars
and not saying anything to the bank unless they discovered it?
Mr. Pilcher. We intended from the very beginning to be
governed by the law as enacted by Congress.
Mr. Issa. But you expressed that you have an opinion on
that, and if I understand correctly, and this is different than
some of the other oil companies' positions, which are not
identical, but varied. Every one of them varies from yours. You
developed an opinion, apparently back in 1996 when you first
signed a contract that said it had a price threshold, that the
act of Congress was in fact different. You believed that if you
hit that threshold you would not pay, and you never told the
Government that.
Mr. Pilcher. We talked about a couple of provisions,
somebody mentioned the Santa Fe Snyder case and the fact that
these improper field designations had been included in there,
which is consistent with the process that applies here. When
there is a problem with the leases, the way those are
challenged by the rules, again, enacted by Congress through the
Administrative Procedures Act, and then by the agency through
its implementing regulations, are to follow the processes that
are out there, which we did. We played precisely by the rules.
And when we were told by the MMS that it wanted to enforce
these provisions, we promptly objected to it.
I understand generally that when we objected to it, or at
some point in that discourse, there was this pending Santa Fe
case, that the response we got back from the Government at some
point was, what we understood it to be was, we are unsure
whether we are going to enforce these mechanisms, we are
waiting on the outcome of the Santa Fe case. And as we
discussed, we think the Santa Fe case was pretty clear, where
the Fifth Circuit has determined conclusively that Congress was
real specific when it determined how royalty relief should be
granted for this 5 year period, and that the Secretary had
exceeded that authority.
We think that same analysis applies to these leases. It was
in error. We intended all along to be bound by precisely what
Congress ordered when it enacted the act.
Mr. Issa. OK, and I am going to turn it over to the ranking
member. I just want to mention for all the panelists, I am sure
you are aware of this, I have authored a bill, H.R. 5231, which
has been referred to the Judiciary Committee, which I also
serve on. Congress has the right to take away anything it wants
to in the way of determination from the courts. That is
specifically applicable when Congress passes a law and the
intent of Congress is questioned.
So I might bring note here that as the day goes on, I
become more convinced that if we cannot reconcile this with
contract sanctity being observed, that errors, to the extent
they existed, being rectified in a non-judicial fashion, that
it may very well be appropriate for Congress to take that
decision away, Congress determine, or reclarify what the law
meant and turn that down.
I am going to turn over to the ranking member, but I will
say that if I signed a contract that said, I will do X, and
then waited until somebody asked me to do X to say that I never
intended to do it because that wasn't enforceable, I would say
that was bad faith. I would say that in fact when you negotiate
a contract, or when a contract is given to you as a heads-up,
heads-down, you do have an obligation to at least in a timely
fashion say, we believe this provision is inconsistent. And it
doesn't appear as though that was done.
Ms. Watson.
Ms. Watson. Thank you so much, Mr. Chairman.
The Interior Department's budget plan projects that over
the next 5 years, companies, including all of you, will pump
about $65 billion worth of oil and gas from public lands
without paying a penny in royalties. So in the New York Times
article, they calculated that this will cost the Government
about $7 billion over that time line.
Meanwhile, the oil industry is enjoying the highest profits
in history. I know that ExxonMobil just posted the highest
revenues ever in the history of business. I was stunned during
the Katrina crisis to learn that in the quarterly reports, the
oil industry recognized billions of dollars worth of profits
and the cost for a gallon of gasoline hit almost near $5.
I know that the MMS can only implement what Congress has
written into law. I think that builds the case for the Markey
Bill, which I described earlier. Let me reiterate it: this bill
would ensure that taxpayers receive the billions of dollars in
future royalty payments that they are owed by the biggest oil
companies, as payments to drill on public lands.
It would suspend the application of any Federal law under
which persons are relieved from the requirement to pay
royalties for productions of oil or natural gas from Federal
lands in periods of high oil and natural gas prices. The bill
is H.R. 4749. It would also require the Minerals Management
Services [MMS], to renegotiate all leases that fail to include
the specific price thresholds.
I want to thank most of you for being responsible corporate
business people. Kerr-McGee is already in court, and that issue
that you have will be settled based on your own court case.
Listening intently to the rest of you, I think there is, and
particularly with Shell, an open-mindedness and an
understanding that we simply need to renegotiate the terms
because circumstances have changed. And I know Mr. Cejka, when
you do that dry drilling, it is a bust. We understand all that.
But I think in this time when we are facing huge natural
disasters, it calls for responsibility on all our parts. My
colleague was absolutely right when he said that these terms
need to be looked at again. That is the way we feel. We need to
look at them in the interest of all parties, particularly the
American taxpayers.
I just told my colleague in the Chair that we probably
should have listened to Shell's presentation at the end,
because I think you have come up with the bottom line of what
these hearings are all about. The title of our hearing was
Mismanagement and Cover-Ups. And the people that we should hold
responsible for clarifying this are not in this hearing today.
We hope to have a subsequent hearing.
You who represent the oil companies are in a dialog with us
about the direction we should go from here on, taking into
consideration a different set of circumstances in 2006-2007
than we had in 1998-1999. I want to thank Shell, particularly,
for their agreeing to take another look.
I don't really have any more questions, Mr. Chairman,
because I think you asked the really crucial questions. I look
forward to another hearing and I look forward to the
cooperation of the oil companies who collectively have made
gigantic profits. I don't look forward to responding to my
constituents in California, many of them are yours, too, who
pay these high prices. Sure, they can run their cars to go on
with the daily duties of their lives, but I certainly can't
talk to them at this point about relief.
I do hear the willingness of your cooperations to sit at
the table and see if we can work out some relief. And we will
also keep in mind contract sanctity, that we are not throwing
out. But I do think it is time for us to sit at the table
again, and thank you, Mr. Hofmeister, for your willingness in
your opening statement, we didn't get it until today, and the
Chair and I were concerned that Shell might not even
participate.
Mr. Issa. They gave us the top rack, too.
Ms. Watson. Yes. So I do appreciate that, and I want you to
know, all panelists, and Mr. Pilcher, you have your
responsibilities. You are now on trial, so I can't hold you
responsible for not being willing to take another look. That
will be determined in the court that you are in.
But the rest of you, I think you are at a point where you
agree that we have to take another look, and thank you so much
for appearing on the panel today. We will continue these
discussions, I know, and Mr. Chairman, thank you very much for
giving us the opportunity to have this dialog.
Mr. Issa. Thank you, Ms. Watson. I am going to just be very
brief, because I think this has been incredibly profitable for
us, a lot has been learned. Mr. Siegele, particularly, I am
very pleased at some of what you have told me. But it has
caused me to ask all of you for an indulgence. If I could ask
each of you to have your companies, and this is a voluntary
request, but I am hoping I will get an agreement here, to
search through and give us copies of all external
correspondence that occurred, in other words, all
correspondence that occurred between your companies or
consultants and the Department of Interior or other groups,
including the American Petroleum Institute, that could be in
any way relevant to your understanding, trying to bring their
understanding. Mr. Siegele, you particularly said there was
this meeting, and hopefully you will get us at least the
members of your company that were there, and hopefully an
understanding of who was there from the Department of Interior,
MMS and so on.
To the extent you can provide us those documents
voluntarily, it would be very, very helpful. Additionally, I
would ask that you, each of your companies work with our staff
to see what documents that might be internally sensitive could
be negotiated to be provided so that we would have a full
understanding of what was going on within the company as far as
understanding that I am not prepared to subpoena that or to
order it at this time. But your voluntary cooperation, as you
have been so forthcoming today, would be helpful.
Ms. Watson. Mr. Chairman, would you yield for just 1
minute?
Mr. Issa. I would be happy to yield.
Ms. Watson. I mentioned a couple of times the bill that we
are going to be considering, H.R. 4749. I would ask also
through the Chair that you take a look at it and maybe Mr.
Pilcher probably will not want to, since you are in a court
case at the moment. But I would like the others of you to take
a look at that bill and give us a critique, give us a response.
Is this something that looks feasible?
I am intending on going on as a co-sponsor with Mr. Markey.
I would like to have some guidance and direction from the oil
companies as to what you feel about it. We certainly will take
your responses into consideration.
Thank you, Mr. Chairman.
Mr. Issa. I would only ask, is it acceptable for each of
your companies to go through, at least here today, make your
best effort to provide those documents, so that we could
further determine what the Department of Interior knew and when
they knew it?
Mr. Hofmeister. We are happy to do a review, yes.
Mr. Issa. Thank you.
Mr. Limbacher. Yes.
Mr. Cejka. Yes, sir.
Mr. Pilcher. Mr. Chairman, I have to make a longer-winded
answer, I apologize.
Mr. Issa. We will go on to Paul and come back to you, is it
OK?
Mr. Siegele. Yes.
Mr. Issa. OK.
Mr. Pilcher. We are happy to make that review. I don't
think there is anything that goes to this issue that you are
investigating. The only concern I have is the fact we are in
litigation and the documents you may be asking for may be
subject to attorney-client privilege. So I would have to confer
with our outside counsel.
But subject to being able to do it, we would be happy to do
it.
Mr. Issa. OK, then I would modify my request to you and ask
that you identify the existence of documents in the normal
privileged way, so that we are aware of what they are and then
we can go through whatever negotiations are necessary to glean
those. But if you would identify them, which is standard in
discovery, that would satisfy your not breaching anything. We
obviously wouldn't take them unless the other thresholds were
cleared.
Mr. Pilcher. Yes, sir.
Ms. Watson. Mr. Chairman, if I may.
Mr. Issa. Yes, I would gladly yield again.
Ms. Watson. Can we put that in writing to them, so they can
respond back? Just give them a letter from our committee?
Mr. Issa. Right. The committee will give you an official
letter, consistent with the record.
Ms. Watson. Great.
Mr. Issa. I want to close by saying that it is not often
that a panel of this type is brought before the Congress. Your
willingness of your companies not only to deliver the highest
level of people knowledgeable in this matter, but your
testimony here today is very much appreciated.
There are a lot of dollars at risk. There is the whole
question of whether the United States believes in contract
sanctity, to include, to be honest, if a mistake is made. We
want to maintain that. Your willingness of many of your
companies to make this sort of an offer that this can be taken
care of in a non-judicial fashion is very much appreciated.
In closing, I didn't ask questions about whether or not
your companies put in reserves in your financial statements,
whether these differences were material and the like. I didn't
do it for two reasons. First of all, this is an internal matter
of what you expected you would gain or not gain.
The primary reason for our hearings today is that we are
deeply concerned that when Congress passes a law, and it
clearly was understood in previous hearings, was understood by
the Department of Interior, their system, their bureaucracy
allows for--we don't have the right on up right now--but it
allows for so many signatures on something that clearly got
changed repeatedly without anybody owning up to the fact that
if one of them implemented properly, Congress, and I know that
is open to debate here, but if one of them implemented, then
clearly the others didn't.
Your help in getting to the bottom of this is appreciated.
Additionally, and in closing, the willingness by many of
those testifying to try to come to a business-like solution
between the landlord and the tenant, if you will, to make the
entire matter something in the past is very much appreciated by
this Chair.
And with that, we stand adjourned.
[Whereupon, at 11:42 a.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
[GRAPHIC] [TIFF OMITTED] 33391.055
[GRAPHIC] [TIFF OMITTED] 33391.056
[GRAPHIC] [TIFF OMITTED] 33391.057
[GRAPHIC] [TIFF OMITTED] 33391.058
[GRAPHIC] [TIFF OMITTED] 33391.059
[GRAPHIC] [TIFF OMITTED] 33391.060
[GRAPHIC] [TIFF OMITTED] 33391.061
[GRAPHIC] [TIFF OMITTED] 33391.062
[GRAPHIC] [TIFF OMITTED] 33391.063
[GRAPHIC] [TIFF OMITTED] 33391.064
[GRAPHIC] [TIFF OMITTED] 33391.065
[GRAPHIC] [TIFF OMITTED] 33391.066