Back in 1998-1999, the Clinton administration wrote contracts for offshore drilling that were supposed to provide royalty relief for oil companies if oil prices fell below $25/barrel. Somehow, the contracts were written without a ceiling price. As a result, royalty relief is available on certain leases no matter how high crude oil prices go.
Congress passed a law that would require companies to pay theroyalties when prices hit a certain level or the companies would beineligible to bid on new leases. The chief beneficiary of theincorrectly written contracts was Kerr-McGee, which was acquired in2006 by Anadarko Petroleum Company (NYSE:APC). Kerr-McGee/Anadarko suedto have the contracts enforced as written. On Monday, the Fifth CircuitCourt agreed with the company, denying an appeal from the US Departmentof Interior.
Provided the government does not appeal to the Supreme Court, thematter is now closed and Anadarko has retained its right to royaltyrelief on the leases, no matter what the price of crude rises to.Its shares jumped on the news Tuesday morning, but they’ve given itall back with other oil companies since then.
Paul Ausick
January 14, 2009
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