Five Reasons Why the Oil Industry’s Opposition to a Fair Share on Public Lands is Wrong

Jun 24, 2015

By Center for Western Priorities

For the first time in nearly a century, the Bureau of Land Management (BLM) is considering an increase to the 12.5 percent royalty rate paid by oil and gas companies drilling on public lands.

A review of the public comments made about BLM’s proposal reveals that the oil industry’s main lobbying and public relations groups are committed to maintaining the status quo rather than modernizing outdated rates.

Industry groups have responded with an old refrain that updating royalty rates would disincentivize drilling on U.S. public lands, where companies face burdensome regulations. For example, Kathleen Sgamma, a spokeswoman for the Western Energy Alliance recently argued:

Rather than commanding a higher royalty rate through responsible regulation of federal lands, the federal government has chosen to extract extra cost in the form of a long regulatory compliance process‚ĶStates can command higher royalty rates because it doesn’t take several years to get project approvals.

But these claims don’t hold up to scrutiny. Here are five reasons why:

1) Research shows higher royalty rates do not slow drilling.

Economic data shows that small yet fiscally meaningful differences in tax and royalty policy do not significantly impact oil and gas production. Wyoming, for example, has the highest effective tax rate on oil and gas in the West but still remains a national leader in production.

By contrast, Montana offers a cautionary tale. In an attempt to attract the drillers, Montana has cut taxes on the industry and now has among the lowest effective tax rates. Yet, drillers are much more interested in drilling across the border in North Dakota ‚Äì where the oil resources are better ‚Äì despite the state’s relatively higher rates. Because of Montana’s oil and gas tax policy, a new well in Montana will generate $800,000 less for the state than an identical well drilled across the border in North Dakota.

2) Oil production is up on U.S. public lands, but taxpayers aren’t getting a fair share

Between 2008 and 2014, oil production increased by nearly 45 percent – from 103 million barrels to 149 million barrels – from onshore oil leases on U.S. public lands.

Five Reasons the Oil Industry's Wrong on Fair Share_graphic

Even though some of the best oil resources are currently sitting under states with significantly more private lands than public lands – for example in North Dakota – the rapid increase in oil production on U.S. public lands shows that companies continue to have considerable access to oil reserves under public lands.

This explosion in oil production on public lands directly contradicts arguments that federal regulations stifle energy development on public lands. Yet, American taxpayers are loosing up to $730 million annually because the BLM has maintained the low 12.5 percent royalty rate.

3) Oil companies have a decade to develop leases on public lands.

Oil and gas companies have ten years to develop a lease on public lands. This long period of time allows companies to speculate and sit on leases with no consequences except for a yearly rental rate of between $1.50 per acre and $2.00 per acre.

The ten-year lease term is significantly longer than those typically found on private and state leases. Texas, for example, offers a five-year lease on state school lands. To encourage diligent development, Texas charges $5 per acre in the first two years, increasing the rate to $2500 per acre in the third year of the lease.

A ten-year lease term is not only more permissive than the terms in many states, it’s allowed companies to stockpile millions of acres of unused leases on public lands at a minimal cost.

4) The nonpartisan Government Accountability Office has criticized low royalty rates.

The Government Accountability Office – the congressional watchdog that investigates how the U.S. government spends taxpayer money – has long maintained that the BLM is unable to ensure taxpayers receive a fair return from onshore oil and gas development.

While the GAO has acknowledged efforts to modernize royalty rates offshore ‚Äì President George W. Bush increased the rates from 12.5 percent to 18.75 percent ‚Äì it continues to raise questions about the U.S. government’s failure to modernize onshore royalty rates.

In 2011, the GAO found that federal oil and gas resources were at a high risk of waste and placed the BLM on its “high risk” list, in part because it was unable to assure taxpayers were receiving a fair return from onshore oil and gas development.

The BLM remains on the GAO’s “high risk” list. Before removing the agency from the list, the GAO has stated that the BLM needs to “… complete updates to oil and gas measurement and onshore royalty rate regulations, among other actions.”

5) No excuse for the disparity between the onshore and offshore rates.

An oil company pays 50 percent less to American taxpayers on an onshore lease than on an offshore lease. Yet, drilling an offshore well is significantly more cost and labor intensive with companies taking on substantial risk.

Noting that offshore rates have been increased – a policy change made by President George W. Bush, a former Texas Governor with a background in oil and gas – the GAO has questioned the discrepancy, writing:

… Onshore lease terms have not changed in recent years though onshore and offshore leasing programs are subject to many of the same market conditions.

Now that the BLM is heeding the GAO’s word and taking steps to modernize the outdated royalty rate, the industry is ready to fight at all costs for stasis.

But the tides are changing, and it’s long passed due for the U.S. government to take steps that ensure all American taxpayers receive a fair return from the development of publicly owned energy resources.