Oil Industry May Lose Offshore Leases To Federal Buyback

OIL companies are preparing to press claims against the United States government for selling them offshore exploration leases that Congress never allowed to be drilled and now wants to buy back.

The loss of drilling rights would represent an historic and bitter defeat for the US oil industry. Its members complain that they are being driven out of the country despite the benefits of finding hydrocarbons at home - reduced dependence on insecure imports, a lower trade deficit, higher employment - and a nearly unblemished environmental record for the last two decades of offshore exploration and production.

The House of Representatives resumed consideration yesterday of the Comprehensive National Energy Policy Act. One provision instructs the Secretary of the Interior to buy back 117 lease blocks off the coasts of Alaska, Florida, and North Carolina for which the oil industry paid $500 million more than a decade ago.

The House was expected to pass its version of the energy bill late last night or today. The bill must then be reconciled to a Senate version that does not include North Carolina in the buyback. President Bush was threatening a veto over provisions related to oil companies, including offshore drilling limits.

Never before has the government bought back offshore exploration rights. Thus, no one is sure how or whether the buyback will work, says Tom Kitsos, a senior policy analyst on the majority staff of the Merchant Marine and Fisheries committee.

For instance, the bill would give Interior the choice of paying the companies cash or foregoing future income from their activities elsewhere in the outer continental shelf. Last year the federal government earned $2.8 billion from the outer continental shelf.

Under the draft law, the companies could recover their bonus bids, annual rental payments, and interest. But the interest rate isn't set. The question of other costs isn't addressed. And the House bill does not appropriate funds for the buybacks, as the Bush administration says it must.

Most oil companies are waiting to see what the final law says on compensation. However, Conoco Inc. filed suit earlier this month in US claims court in Washington. The Houston-based company seeks to recover $37 million in expenses and interest incurred on its offshore leases. "We can't afford [the delay] anymore," Conoco spokesman Tom DeCola says. "That's a lot of money for us to have tied up. Times are tough." Conoco recently cut its exploration budget by 15 percent.

Many more companies could take similar action. For instance, Conoco has seven partners in its acreage off North Carolina. One is Occidental Petroleum, which hasn't joined the lawsuit but has had informational meetings with Conoco's lawyers. Occidental has also begun adding up the cost of the geological and geophysical work it did prior to acquiring the North Carolina acreage.

Joe Lastelic of the American Petroleum Institute says the canceled leases represent "a lost business opportunity." He says the companies will demand not just costs plus interest, but "a fair rate of return on the money they put into Uncle Sam's pocket."

Another part of the House bill would prevent the government from leasing Bristol Bay in Alaska and any waters off the East and West Coasts until 2002. But will anyone be interested, considering the history of government delays and now possibly buybacks? "Why should we go out on some other area and put our time in" when there's no assurance the government will keep its word, asks Mr. Lastelic. "Their word is not their bond."