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Royalty Fees for Leaking Oil?

BP managed to secure the containment dome over the leaking well last night, but that has not yet resulted in the capture of much oil. Black stuff continued to gush out of the sides beyond the dome, and while some oil may be flowing up the dome to a waiting tanker, it’s unclear how much good this technique has done, at least in the near term. BP plans to close some more valves on the dome in an attempt to capture more oil.

Of course, even if the dome succeeded in completely stopping the leak, the devastation of 45 days of uninterrupted flow remains. And the oil is having a terrible impact, with some of the worst pictures coming out yesterday.

As the emergency management continues, the feds have begun to charge BP for their cleanup costs. The first $69 million dollar bill went in the mail yesterday. But while BP could easily make up for that by selling the oil they capture in the containment dome (they could raise as much as $85 million in the next two months off of it), there’s one lingering cost out there, unremarked upon until just now by House Natural Resources Committee chair Nick Rahall, which really would create a terrible financial blow for BP:

The top Democrat on the House Natural Resources committee wants Attorney General Eric Holder to force BP to pay back oil drilling royalties that the government is losing as a result of the massive oil leak in the Gulf of Mexico.

West Virginia Democrat Nick Rahall, in a letter to Holder this week, asked that the Justice department take “legal action to recover damages owed to the United States for lost royalties.”

The issue of royalties has largely been left aside in the flurry of congressional action since the spill. When a company drills in U.S. waters, it signs a lease with the government and pays royalties for the oil it draws from the ground. Rahall says that the government’s lease with BP stipulates an 18.75% royalty.

So BP would have to pay, if Rahall’s suggestion is taken up, an 18.75% royalty on hundreds of thousands if not millions of barrels of oil which they will never be able to sell. Obviously measuring just how much oil has been spilled is the key here. And it makes sense – the royalty is on the oil extracted, what you do with it afterwards is really not the problem of the United States.

When you start combining that expense with the potential $4,300 a barrel fine under the Clean Water Act, and the liabilities which could be raised to an unlimited amount if the cap is removed by Congress, and other expenses, then you start to understand why Moody’s and Fitch downgraded BP yesterday.

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David Dayen

David Dayen