The agency had ordered Chevron to pay $6 million in additional royalties but could have sought tens of millions more had it prevailed. The decision also sets a precedent that could make it easier for oil and gas companies to lower the value of what they pump each year from federal property and thus their payments to the government.
Interior officials said Friday that they had no choice but to drop their order to Chevron because a department appeals board had ruled against auditors in a separate case.
But state governments and private landowners have challenged the company over essentially the same practices and reached settlements in which the company has paid $70 million in additional royalties.
In a written statement, the department's Minerals Management Service said it would have been useless to fight Chevron.
"It is not in the public interest to spend federal dollars pursuing claims that have little or no chance of success," the agency said. "MMS lost a contested and controversial issue" before the appeals board. "Had we simply wanted to capitulate to 'big oil,' the agency would not have issued the order in the first place."
Trying to pay correctly
Chevron said in a written statement that it "endeavors to calculate and pay its oil and gas royalties correctly," and the Interior Department had agreed.The agency notified Chevron of its decision in a confidential letter on Aug. 3, which the New York Times obtained under the Freedom of Information Act.
The reversal in the case, which involves Chevron's accounting of natural gas sales to a company it partly owned, has renewed criticism that the Bush administration is reluctant to confront oil and gas companies and is lax in collecting royalties.
In return for the right to drill on federal lands and in federal waters, energy companies are required to pay the government a share of their proceeds. Last year, businesses producing natural gas paid more than $5.1 billion in government royalties.
But the Bush administration has come under fire on Capitol Hill for its record on collecting payments. While the Interior Department has sweetened incentives for exploration and pushed to open wilderness areas for drilling, it has also cut back on full-scale audits of companies intended to make sure they are paying their full share.
Administration officials knew that dozens of companies had incorrectly claimed exemptions from royalties since 2003, but they waited until December 2005 to send letters demanding $500 million in repayments.
In February, the Interior Department acknowledged that oil companies could escape more than $7 billion in payments because of mistakes in leases signed in the 1990s. Top officials are trying to renegotiate those deals, but some Republicans and Democrats have complained that the administration is dragging its feet.
Dynegy involved
In the Chevron case, auditors in the Minerals Management Service were addressing an issue that had bedeviled royalty enforcement for decades: How does the government make sure it gets its due when companies sell natural gas to businesses they partly own?In 1996, Chevron sold its holdings in more than 50 processing plants to Dynegy in exchange for a 26 percent stake in the natural gas company, which is based in Houston. For the next seven years, Chevron sold virtually all its domestic natural gas to Dynegy for processing.
In their original accusations, dating to 2001, the auditors asserted Chevron had understated sales, and hence its royalty obligations, by inflating costs for processing gas at Dynegy.
