WASHINGTON — The Obama administration on Friday took the first formal steps to boosting the royalties that energy companies must pay for oil and gas they pull from public lands.
The Bureau of Land Management’s announcement that it would be proposing changes — and inviting public comment on the scope of them — marks the first major effort in decades to update onshore royalty rates that are among the lowest in the world.
“It’s time to have a candid conversation about whether the American taxpayer is getting the right return for the development of oil and gas resources on public lands,” said Interior Secretary Sally Jewell.
Royalty rates are currently locked in at 12.5 percent of the value of oil and gas extracted from public land — in contrast to the 18.75 percent charged for production from federal offshore leases.
The Government Accountability Office has repeatedly cast the United States’ royalty rates and rental payments as too low — below what many states and private landowners charge. Some lawmakers insist the current approach means oil and gas companies are paying far less than fair market value for the fossil fuels they harvest on federal lands.
“The royalty rate for oil and gas on U.S.-owned lands has lagged behind the royalty rate of states and for offshore areas like the Gulf of Mexico, and has been costing local governments and taxpayers hundreds of millions of dollars in lost revenue,” said Matt Lee-Ashley, the director of public lands at the liberal Center for American Progress. “This is a common sense step toward delivering a fairer return for taxpayers from the oil and gas boom and leveling the playing field within U.S. energy markets.”
But oil industry leaders said any royalty hikes onshore could further discourage interest in resources on public lands, building on private sector’s existing concerns about navigating regulatory mandates and about permitting delays on the territory.
“Despite the renaissance on state and private lands, energy production on federal lands has fallen, and yet another set of costly changes to federal rules could drive more economic development and job creation off public lands,” said Erik Milito, upstream director for the American Petroleum Institute. “Clear, consistent leasing and royalty terms are part of what makes investments possible, so preserving certainty in the process is critical for the consumers and workers that benefit from domestic production.”
Industry representatives pointed to a 2011 study completed by the IHS CERA consultancy for the Interior Department suggesting that U.S. royalty rates may not be out of line compared with the amounts charged in some states and other countries — particularly since they can be complemented by high bonus bids at government auctions selling oil and gas leases.
“If Interior now chooses to enact higher royalty rates and fees, it will likely result in lower revenue to the American taxpayer because it will accelerate the exit of producers from public lands,” said Kathleen Sgamma, vice president of government affairs with the Western Energy Alliance.
The move is coming amid an oil price decline that has already forced capital spending cuts and layoffs nationwide.
“At a time when the price of oil has dropped 50 percent over the past seven months and coupled with new federal regulations for onshore producers, the Obama administration’s proposal to increase onshore royalty rates will ultimately result in fewer American jobs, less energy production, and hurt our nation’s energy security,” said Dan Naatz, a senior vice president of government relations for the Independent Petroleum Association of America.
In unveiling an “advanced notice of proposed rule making” on the subject Friday, the Bureau of Land Management is essentially kickstarting a long-planned public conversation about what the government should charge for the oil and gas on public lands. The royalties for oil and gas production on tribal lands would not be affected by the rulemaking.
The agency also is inviting public comment on possible other changes to the minimum bids energy companies pay when the government auctions onshore oil and gas leases, the civil penalties that can be imposed for regulatory violations and the financial assurances that ensure drilled sites will be properly reclaimed even if a firm goes under.
The current minimum bonding rates and maximum penalties haven’t kept up with the times, suggested BLM Director Neil Kornze, in a statement.
“Today’s bonding rates were set when Dwight D. Eisenhower was president,” Kornze said. “We are long overdue to consider an update that will help us ensure that oil and gas sites are properly managed and reclaimed and that taxpayers aren’t left picking up the tab.”
The current minimum acceptable bid in onshore auctions is $2 per acre. Because that is well below the rate at which most tracts sell, Interior officials believe the floor for those bids could be higher.
Rental rates are generally set at $1.50 per acre annually for the first five years of a lease, increasing to $2 per acre for years five through 10.
Some critics say that structure doesn’t provide sufficient financial prodding for oil and gas companies to diligently develop leases. In its notice, the Bureau of Land Management invites the public to suggest how rental payments might be better structured to incentivize oil and gas development on leased tracts.
Janice Schneider, the assistant Interior secretary for land and minerals management, said regulators “will conduct a thorough analysis of the cost of doing business on federal lands.”
“We welcome input from all parties on how taxpayers can be better assured adequate compensation from oil and gas production on public lands,” Schneider said in a statement. “We also want to ensure those resources are developed diligently and responsibly and that financial assurances and penalties reflect the true costs of modern day oil and gas development and reclamation.”
The public will have 45 days to comment on the possible changes, which have long been foreshadowed by the Obama administration. Former Interior Secretary Ken Salazar stressed that onshore royalty rates needed updating years ago, and the Obama administration has used its annual budget proposals to call for changes.
Because the current 12.5 percent royalty rate is locked in to many regulations, Interior Department officials cannot change it without a formal rulemaking process — one reason it has stayed at that level for so long, even while the administration hiked the rates for offshore production.
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 since 2009, at least. And in 1981, a commission chartered by the Interior Department recommended hiking onshore royalties.
Any proposed royalty rates could vary for different regions, states or resources — instead of a single number that applies uniformly across the United States.