Are Taxpayers Getting Their Fair Share of Oil Royalties?

MOORPARK, CA - SEPTEMBER 23: Smoke blows past oil wells at sunset on the eastern flank of the 16,000-plus-acre Guiberson fire, burning out of control for a second day as Red Flag warnings continue in southern California on September 23, 2009 near Moorpark, California. A Red Flag warning means critical wildfire weather, based on a combination of high temperatures, low humidity and Santa Ana winds, is occurring. Several large wildfires broke out in triple-digit temperatures on the first of Red Flag warnings.
National Journal
Ben Geman
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Ben Geman
Dec. 17, 2013, 5:03 a.m.

The In­teri­or De­part­ment should beef up ef­forts to en­sure tax­pay­ers get a fair re­turn on bil­lions of dol­lars worth of pet­ro­leum that oil and gas com­pan­ies pro­duce from fed­er­al lands and wa­ters, con­gres­sion­al aud­it­ors said.

A Gov­ern­ment Ac­count­ab­il­ity Of­fice re­port re­leased Tues­day looks crit­ic­ally at the in­tric­ate sys­tem of lease terms for com­pan­ies that took in over $66 bil­lion in fisc­al 2012 from the sale of pet­ro­leum pro­duced in fed­er­ally owned re­gions.

The re­port is most crit­ic­al of In­teri­or’s man­age­ment of on­shore areas, ar­guing that reg­u­lat­ors have been slug­gish in try­ing to ad­just roy­alty rates that have re­mained stat­ic at 12.5 per­cent even as oil prices — and com­pan­ies’ re­turns — have soared.

“As a res­ult of not suc­cess­fully chan­ging fed­er­al reg­u­la­tions to provide it­self with the flex­ib­il­ity needed to make timely ad­just­ments to on­shore lease terms, In­teri­or’s abil­ity to en­sure that the pub­lic is re­ceiv­ing a fair re­turn is lim­ited,” the re­port states.

“Moreover, In­teri­or con­tin­ues to of­fer on­shore leases with lease terms — terms last­ing the life of the lease — that have not been ad­jus­ted in re­sponse to chan­ging mar­ket con­di­tions, po­ten­tially fore­go­ing a con­sid­er­able amount of rev­en­ue,” adds the re­port that Sen­ate En­ergy and Nat­ur­al Re­sources Com­mit­tee Chair­man Ron Wyden, D-Ore., re­ques­ted.

It cred­its In­teri­or with some im­prove­ments, in­clud­ing in the man­age­ment of off­shore de­vel­op­ment, where roy­alty rates have in­creased, but said more is needed. That’s es­pe­cially true for on­shore re­gions, where In­teri­or has less lee­way to make changes ab­sent form­al changes to its reg­u­la­tions.

Oil and gas pro­du­cers paid the fed­er­al gov­ern­ment $10 bil­lion in roy­al­ties and oth­er pay­ments in fisc­al 2012 from fed­er­al lands and wa­ters, but the re­port sug­gests a bet­ter re­turn is pos­sible.

In­teri­or, in a re­sponse to GAO in­cluded with the re­port, said it’s work­ing to ad­dress re­com­mend­a­tions to up­date its rules and policies.

The de­part­ment’s plans in­clude a new reg­u­la­tion that will al­low In­teri­or “broad flex­ib­il­ity” to set on­shore roy­alty rates, ac­cord­ing to a let­ter to GAO from Rhea Suh, In­teri­or’s as­sist­ant sec­ret­ary for policy, man­age­ment, and budget.

Wyden has said he hopes to im­prove the fed­er­al sys­tem that gov­erns en­ergy roy­al­ties.

In a state­ment Tues­day, Wyden said the GAO re­port “drives home the point” that In­teri­or “may not be keep­ing up with times.”

“The In­teri­or De­part­ment has an ob­lig­a­tion to en­sure Amer­ic­an tax­pay­ers are get­ting a fair re­turn for com­mer­cial use of their pub­lic lands. Since a ma­jor share of on­shore roy­al­ties also go to states and In­di­an tribes, short­com­ings in roy­alty col­lec­tions also short those states and Tribes,” he said.

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