How Big Oil Is Drilling For Cheap

Big oil firms often come under fire for receiving everything from favorable tax treatment to government subsidies to conduct their business. And now it appears that another factor can be added to that list, as Representative Edward Markey of Massachusetts has begun pushing for a legislation change. The laws that he seeks to amend favor drilling royalties for some of the biggest names in the industry, with over 100 companies taking advantage of the policy [for more oil news and analysis subscribe to our free newsletter].

Royalty-Free

“Under a law passed in 1995 any leases signed between 1996 and 2000 offered lower royalty fees in order to encourage drilling whilst oil and gas prices were so low; once the price rebounded above a certain level a clause in the lease stated that the royalties would return to the normal level,” writes James Burgess. Yet, when oil prices rebounded in 1998 and 1999, an error in Washington allowed for a number of companies to still grossly underpay for drilling rights.

Oil RigRepresentative Markey names some of the biggest firms in the industry, like Exxon Mobil (XOM) and Chevron (CVX), as being among the offenders. It is believed that Chevron avoided nearly $1.5 billion in payments thanks to the legal snafu. Though the Bush administration attempted to fix the error in 2006, it still remains an issue [see also Company Profile: Exxon Mobil].

Though Markey is fighting to have the oil firms pay their fair share, it may be some time (if ever) that these costs are accrued. Lobbying against big oil has long proven difficult in Washington as many of these firms are among the biggest in the world. Investors in any of these major producers will want to keep an eye on the situation, but will not need to direct too much attention that way.

Given that the issue has become highly political, you can expect red tape and a painstaking process that will be slow to develop. Should these firms have to go back and make any kind of payments, investors will likely know well in advance and will be able to prepare accordingly.

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Disclosure: No positions at time of writing.

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