What implications will Anadarko verdict have?

Anadarko Petroleum

On Monday, the Supreme Court passed a ruling that the Obama Administration claims could block the federal government from collecting as much as $53 billion in royalties from energy companies drilling in the deep waters in the Gulf of Mexico.

The justices declined to hear the government's appeal of the January 12 decision by the 5th US Circuit Court of Appeals, that Anadarko Petroleum Corp. does not owe the Interior Department at least $350 million in royalties for production beginning in 2002, reported Chron.com.

However, the decision is likely to have implications far beyond Woodlands-based Anadarko, and will undoubtedly give other companies, that have 'previous' with the Interior Department, a resurgence in confidence. A number of companies - there were around 21 similar royalty disputes pending administrative appeals waiting on the outcome of the Anadarko case - that have tangled with the Department over whether they owe royalties on leases signed under a 14-year-old law that did away with payments in order to stimulate production.

This is not good news for the administration. According to the Government Accountability Office, the royalties in point could total as much as $53 billion over 25 years. There are various estimates as to the value of lost future royalties, because all are based on projected prices for natural gas and crude - as well as the amount that would be produced under the leases. But whatever the exact amount, you can be sure that the total cost will be huge.

Justified or not, the oil industry is now likely to see a "geyser of tens of billions of dollars in windfall profits at the expense of American taxpayers," according to Rep. Ed Markey, D-Mass. For the time being at least, the verdict also gives oil companies a license to drill more freely without incurring penalties.

The Supreme Court's move on Monday marks the end of a legal battle that began when energy company Kerr-McGee, purchased by Anadarko in 2006, filed a lawsuit to challenge royalty payments. It has finished in a way the companies had always hoped for.

However, the case could also see Capitol Hill move towards stricter regulations on how and where oil companies drill, and increase government efforts to rein in royalty relief. Last year, the House passed a bill authored by Markey that would have barred energy companies from buying new leases unless they paid new fees or renegotiated existing contracts to include price ceilings for royalty waivers.

Although this measure did not become law, similar provisions are going through Congress right now.

President Obama has also asked Congress to impose a new excise tax on offshore oil and gas production designed to target companies getting "excessive royalty relief."

The verdict signals good news for the industry, which has managed to get one over on Washington. But the government won't sit back and let this become the norm The feeling of freedom stemming from the Anadarko case will be short-lived, as the White House are determined not to let deepwater drilling become economically unviable, only serving to drain federal coffers of billions of dollars in lost revenue.

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