A Deal’s a Deal (Unless You’re the Government)

Sounds like the U.S. Government needs to hire some competent lawyers.

Lucrative Gulf of Mexico drilling loophole survives challenge in U.S. House

On a mostly party-line vote, The House Friday night rejected a Democratic amendment that would have corrected a 1995 mistake in drilling rules [sic] that allowed oil and gas companies to drill in portions of the Gulf of Mexico without paying royalties.

The amendment would have saved $1.5 billion in 2011, and $53 billion over the next 25 years, according to the measure’s Democratic sponsors. The windfall is a result of a mistake made by the Clinton administration’s oil and gas regulators in 1995, which Congress has been unwilling to change, despite several attempts over the 16 years.

I hate to nit-pick, but the mistake was not made in “drilling rules”, but in the oil and gas lease form that was written by by government attorneys, subject to competitive bid in two lease sales back in the 1990s.

Here’s what happened: back in the ’90s, oil prices were too low to justify oil exploration in the deepwater Gulf of Mexico. To encourage oil companies to bid on the leases, and the winners subsequently to explore them, the U.S. Government as landowner proposed to waive the (then) 12.5% royalty on certain deepwater leases. The 0% royalty was supposed to revert to 12.5% if oil prices ever exceeded $35 per barrel.

But the section of the lease that addressed the $35 price cap was inadvertently left out of the contract. Ooops.

The leases were subject to competitive bid.

Years passed, and several of the leases were drilled, resulting in a number of discoveries. When the price of oil later climbed past $35, the mistake became apparent.

The (then) Minerals Management Service asked companies to honor the “spirit” of the royalty relief. Some companies complied and paid the royalty per the intent. Some said no.

Congress has huffed and puffed, but has so far been unable to compel the cooperation of the latter group.

I’m no lawyer, but my impression is that in real estate matters, the contract (in this case, the oil and gas lease) is the entirety of the agreement between the parties. In this matter, the courts have ruled favor of the oil companies.

What do you think would have happened if the mistake in a contract happened to favor the Government? Is there any chance that the Government would roll?

Cross-posted at RedState.com.

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