Report: Taxpayers not getting fair return from drilling

WASHINGTON — American taxpayers may not be getting the payout they deserve from oil and gas harvested on public lands, government investigators said Tuesday.

The U.S. now charges among the lowest royalty and lease rates in the world for onshore oil and gas activity. And while the Interior Department has hiked the rates it charges for offshore oil and gas leases on the outer continental shelf, the Government Accountability Office said internal regulations have blocked it from regularly doing the same on public land.

According to a new report from the GAO, it has been decades since the Interior Department’s Bureau of Land Management last updated onshore royalty rates, which are fixed in many regulations at 12.5 percent. By contrast, the government generally charges 18.75 percent royalties for oil and gas produced from federal waters.

Getting fleeced

The result, said Sen. Ron Wyden, D-Ore., is that Americans may be getting fleeced, with oil and gas companies paying far less than fair market value for the fossil fuels they harvest.

“It’s fair to say that it is not clear the Interior Department — and especially the BLM — has always kept up with the times,” Wyden said at a Senate Energy and Natural Resources Committee hearing Tuesday.

Bobby McEnaney, a senior analyst with the Natural Resources Defense Council, said the GAO’s findings illustrate the oil and gas industry has been treated with kid gloves.

“The American people deserve better, including a fair share of royalties from resources that belong to all of us,” McEnaney said. “Charging the lowest royalties in the entire world is fiscally irresponsible.”

Back burner

The Obama administration has counted on new fees for onshore oil and gas activity in its budget request to Congress.

But broad changes have been on the back burner for years. In 1981, a commission chartered by the Interior Department recommended hiking onshore royalties. And since 2009, at least, the Bureau of Land Management has been mulling new rules that would give the secretary of the Interior broad flexibility to set new onshore royalty rates.

According to the GAO, the planned regulatory revisions would have given the Interior Secretary the flexibility to review and revise royalty rates for onshore leases whenever appropriate, the same kind of authority that applies offshore. That would be a big change from the current approach, which requires a full-scale regulatory rewrite and rule making that can span years.

Varied royalty rates

But the Interior Department abandoned work on that proposal and, according to GAO, now “plans to ask the public to comment on whether and how royalty rates . . . should be revised to ensure a fair return to the public.” Instead of a rate that applies uniformly across the U.S., the Interior Department could set different percentages for different regions, states or resources.

Interior spokeswoman Jessica Kershaw said modernizing the regulatory regime is “a high priority” for the department.

And Neil Kornze, the nominee to lead the Bureau of Land Management, said he would address the issue if confirmed.

“We’re making progress on some fronts,” Kornze said. “You can be sure . . . we will continue to take fair return for the taxpayer very seriously.”

Simplifying payments

Separately, the Interior Department is looking at new rules that would effectively simplify royalty payments — a response to concerns that complex valuation regulations can lead to inaccurate payments by industry. The Interior Department published an advanced notice of proposed rule making in May 2011, kick starting that process, with a proposal expected to be unveiled next year.

The GAO credits the Interior with taking some steps to ensure taxpayers get a fair return from oil and gas development on federal territory, including raising the offshore royalty rates and getting third-party studies of the current fiscal system.

There have been numerous changes offshore:

  • In 2007, the government raised the royalty rate from 12.5 percent to 16.67 percent for new Gulf of Mexico leases in more than 400 feet of water.
  • A year later, the Interior Department raised the rate again, for all Gulf leases, to 18.75 percent, where they stand now.
  • The Interior Department also imposed new, escalating rental rates meant to spur faster development of leases.
  • The Interior Department’s Bureau of Ocean Energy Management also raised the minimum bid required for Gulf of Mexico oil and gas leases located in at least 400 meters of water to $100 per acre, up from $37.50.

This is just the latest in a series of GAO reports studying the way the federal government collects money from oil and gas development on public land and waters.

The GAO, which is Congress’ investigative arm, concluded in May 2007 that the U.S. receives one of the lowest government takes as a percentage of the value of the oil and natural gas produced in the world. A year later, the GAO reported that Interior did not routinely evaluate its oil and gas fiscal system and recommended an independent panel to analyze it.

(Government Accountability Office)

(Government Accountability Office)