[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
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                     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:]
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    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
    
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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:]
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    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 
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