U.S. Drops Bid Over Royalties From Chevron [New York Times]
Summary: The Interior Department has dropped claims that Chevron underpaid the government for natural gas produced in the Gulf of Mexico. Although the government was claiming only a paltry $6 million, the decision to drop the case sets a precedent that could allow energy companies to avoid paying hundreds of millions in royalties in the future. The folding of the government in the case has fanned criticism of the Bush administration, seeming as it does to suggest a reluctance to take on big oil. In return for the right to drill on federal lands and in federal waters, energy companies are supposed to pay the government a percentage of proceeds. The administration has been lax, however, about collecting those payments. At the same time that it has "sweetened incentives" for exploration and allowed drilling in open wilderness areas, it has scaled back on royalty audits. The Interior Department has been publicly accused by government auditors of stonewalling their attempts to recover over $30 million from several major oil corporations, including Shell Oil. The problem appears to originate in error-filled leases signed during the 1990s that could permit oil companies to evade payment of over $7 billion. The government claims it is renegotiating those deals, but politicians on both sides of the aisle accuse the administration of foot-dragging. In this case, the Interior Department claimed Chevron had inflated processing costs, sometimes by as much as five times, in order to reduce the value on which royalties were based. Chevron paid the $6 million the government demanded but appealed the case.
Related links: Chevron Q3 2006 Earnings Call Transcript • Buyer Beware: Oil Stocks Headed for a Correction • Cramer's 'Mad Money' Recap: Chevron Chase
Potentially impacted stocks and ETFs: Chevron Corporation (CVX) • iShares Russell 1000 Value Index (IWD), WisdomTree High-Yielding Equity (DHS), WisdomTree LargeCap Dividend (DLN), WisdomTree Total Dividend (DTD), iShares Russell 3000 Value Index (IWW)
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