DC Dispatch

Interior considers hike in oil and gas royalty rates

Industry opposes reforms at a time when low oil prices deter drilling.

Elizabeth Shogren DC Dispatch April 21, 2015

The Department of Interior is considering updating rules governing royalties and other costs companies pay for producing oil and gas on federal lands that have not been changed in decades. Officials say the rules don’t sufficiently compensate the public for the value of oil and gas produced from federal lands.

Rig tapping the Mancos shale using horizontal techniques. Once the drilling is complete, the well is fracked. Courtesy WildEarth Guardians.

A 2007 GAO report found that the federal government receives one of the lowest government takes in the world. Since then, the Interior Department has increased royalties for offshore production but not on production from onshore federal lands.

The current royalty rate on federal land – 12.5 percent of the value of production – lags behind rates charged by many private landowners and states. The Government Accountability Office and Interior Department Inspector General repeatedly have criticized the outdated royalty rules, saying they reduce revenues to the detriment of taxpayers. In 2011, Interior estimated that onshore royalty rate changes could increase revenue collections by about $1.25 billion over 10 years.

In its notice of proposed rulemaking, the Interior Department is asking for public comment on a future regulation that would give the Interior secretary flexibility to adjust royalty rates in response to changes in the oil and gas market.

Interior Secretary Sally Jewell gave her rationale for the reform during her address on energy policy last month, as HCN reported.

“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 Jewell.

The notice of proposed rulemaking comes as production of oil on federal land has increased in each of the past six years. Combined production was up 81 percent in 2014 versus 2008, according to the department.

Environmental groups welcomed the idea of increasing royalties, especially since drilling removes federal lands, at least temporarily, from other uses the public values, including recreation. “When these rules were last revised in the early 1980’s, the cost of a gallon of gasoline was only $1.08, milk was $2.30 and postage stamps were 22 cents,” said Chase Huntley, Government Relations Director for the Wilderness Society’s energy program.

Drilling companies objected to raising royalties, especially given the low price of oil. “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.” Dan Naatz, a senior vice president of Independent Petroleum Association of America, said in a press release.

The Interior Department also will consider whether companies should post larger bonds to cover the cost to plug wells and restore drilling sites. Current rates – $10,000 for a lease-wide bond, $25,000 for a statewide bond, and $150,000 for a nationwide bond – were set several decades ago.

As HCN has reported, the low rates have translated into many abandoned well sites in Wyoming and other Western states.

“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,” Bureau of Land Management chief Neil Kornze said.

Other oil and gas rules on the table for discussion include minimum bids at auctions, now set at $2 an acre, and rental rates charged before companies start producing. Current rentals are $1.50 per acre for the first five years and $2.00 for years five through ten.

Missing from the department’s press release was any mention of reforming royalties to reflect the impacts of the greenhouse gases from oil and gas extracted from federal lands. Methane, a potent greenhouse gas, leaks from equipment during drilling and production and carbon dioxide emissions come from burning oil and gas in vehicles and to make electricity.

Greenwire recently reported that the BLM is working on a memorandum to staff on the social cost of carbon. And, Interior’s former deputy director, David Hayes, last month wrote an opinion piece in the New York Times advocating that the price for “taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions.”

A senior Interior official confirmed that the Obama administration is considering a new policy to guide BLM officials on how to calculate the social cost of carbon. But the official, who spoke on the condition of anonymity, said the policy would relate to coal and not to gas or oil. The official also said the policy under consideration would impact “the front end”– the calculation of environmental impacts required for leasing coal – and not royalty costs.

The public will have 45 days starting now to comment on whether the government should reform royalties and other costs to oil and gas companies that drill on federal land. After analyzing the comments, Interior will decide whether to draft a new policy. It hasn't given a timeline for action.

Elizabeth Shogren is HCN's DC Correspondent. Follow her @ShogrenE.

Republish Print