Legal Issues Raised by Provision in House Energy Bill (H.R. 6) Creating Incentives for Certain OCS Leaseholders to Accept Price Thresholds

Publication Date: April 2007

Publisher: Library of Congress. Congressional Research Service

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Research Area: Energy

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Abstract:

In February 2007, Congress began looking into why certain oil and gas leases on the Outer Continental Shelf (OCS) -- specifically, some 1,024 deep water leases in the Gulf of Mexico issued in 1998 and 1999 -- did not contain "price thresholds." A price threshold in an OCS oil and gas lease means that once the market price for oil and natural gas rises above a certain price, the lessee's freedom from having to pay royalties no longer applies. Such freedom from paying royalties was thought necessary by Congress to promote exploration and production in deep water areas of the Gulf, and was embodied in the Outer Continental Shelf Deep Water Royalty Relief Act (DWRRA), enacted in 1995. Various legislative proposals surfaced to encourage holders of the 1998/1999 leases to renegotiate the terms of their leases so as to include price thresholds for future production of oil and gas.

This report looks at several of the legal issues arguably raised by one such proposal, which on January 18, 2007, passed the House of Representatives as section 204 of H.R. 6, the House energy bill (more formally, the Creating Long-Term Energy Alternatives for the Nation Act of 2007 or the CLEAN Energy Act of 2007). Section 204 provides that a party that holds one of the 1998 and 1999 leases will not be eligible to bid on future leases auctioned by the Secretary of the Interior, generally through the Minerals Management Service (MMS) unless the lessee either renegotiates the lease terms to include a price threshold or pays a "conservation of resources" fee established by the Secretary of the Interior.

This report analyzes potential legal challenges to section 204, including whether the provisions of section 204 (1) work a "taking" under the Takings Clause of the Fifth Amendment, (2) offend the doctrine of unconstitutional conditions, (3) violate either the substantive due process or equal protection guarantees applied by the Fifth Amendment, or (4) effect a breach of contract. Finally, the report deals with whether legal action against the leaseholders in question independent of section 204 might be possible under the contract theories of unilateral or mutual mistake.