Tuesday, July 20, 2010

DOI: BP liable for royalties on spilled oil

Ouch

(BP Liable for Reporting and Royalties on Oil and Gas from Leaking Well, Department of the Interior)
Interior’s chief oil and gas regulatory official has informed BP that it must report all oil and gas-related activities at the damaged Macondo well and pay royalties on all oil and gas captured from the leaking well. The company also will be liable for royalties on lost or wasted oil and gas if it is determined that negligence or regulatory violations caused or contributed to the Deepwater Horizon explosion and subsequent leak.

Michael R. Bromwich, director of Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM), officially notified BP of its reporting responsibility and royalty liability in a July 15th letter to Guy Otwell, of BP America Inc.’s Tax Department, noting that the company’s failure to fulfill these obligations could be considered a knowing and willful violation of the Federal Oil and Gas Royalty Management Act. Bromwich’s letter also noted that the Interior Department reserves “any and all rights and remedies available to the United States arising from the Deepwater Horizon oil spill.”
A lot of us here at the Evil Empire were wondering how BP was going to have to deal with that. It makes sense though, since royalties are really a payment for mineral wealth extracted from the earth.

Typically, royalties are paid on volumes sold, with the expectation being that almost all volumes, minus loss allowances, will eventually pass through the sales point. In a case where volumes are lost not due to a force majeure, then the producer could also be liable for royalties on those un-sold volumes as well.

I'm sure BP didn't want to see that, but there you go. It's a very real financial incentive to not scrimp on safety. Some companies realize this.

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