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Are the revenues right? GAO report urges assessment of royalties, taxes from federal oil and gas leases Alan Bailey Petroleum News
With the run-up of oil and gas prices during the past couple of years, the federal government may be falling short in the revenues that it collects from U.S. oil and gas leases?
The U.S. Government Accountability Office, in a report issued Sept. 3, said instability in the nation’s fiscal system for oil and gas leasing and the lack of an up-to-date assessment of that system have created a risk that the United States may not be collecting as much oil and gas revenue as it might, and that an independent review of the fiscal parameters of federal oil and gas leasing is warranted.
The U.S. Department of the Interior, which oversees federal leasing onshore through the Bureau of Land Management and offshore through the U.S. Minerals Management Service, has challenged several of the GAO findings.
The GAO report is the result of a follow-up to a 2007 report by the agency, which concluded that U.S. federal revenues from oil and gas are low compared with those collected by other resource owners.
“In May 2007 we reported that, based on studies by industry experts, the amount of money that the U.S. government receives from the production of oil and gas on federal lands and waters … was among the lowest in the world,” Frank Rusco, GAO acting director, natural resources and environment, said in the letter to Congress that constitutes the body of the GAO report. “The government take that accrues to any government resource owner is largely determined by the government’s oil and gas fiscal system — the precise mix and total amount of payments made to the government for the rights to explore, develop and sell oil and gas resources.”
Balance needed A “fair government take” requires the establishment of a balance between encouraging private companies to invest in oil and gas development and the need to maintain the public interest in collecting the appropriate level of revenue, Rusco said.
In recent years many countries have responded to changing market conditions such as increased industry profits by re-evaluating their revenue collection from oil and gas production. Some countries with uncertain oil and gas resources have actually reduced their government oil and gas take, but many countries have significantly increased their take, he said.
Rusco cited a Wood Mackenzie report as identifying the most prominent fiscal trend at the moment as the imposition of windfall profits taxes or other mechanisms to increase the resource owners’ shares of oil and gas revenues.
“For example, the State of Alaska recently increased its government take and changed the terms of contracts to give Alaska larger shares of revenues as oil and gas prices increase,” Rusco said.
At the same time countries such as Algeria, Russia and Venezuela also have tightened their controls over their own resources, he said.
Attractive targets U.S. regions such as the Gulf of Mexico remain attractive targets for oil and gas investment because, in addition to a relatively low government take, they have large remaining resources and because the United States is generally a good place to do business, when compared with many other countries with comparable oil and gas resources, Rusco said. And, as oil and gas prices have risen, the number of drilling rigs operating onshore and offshore in the United States has increased faster than in the rest of the world.
But Wood Mackenzie found that periodic changes in fiscal terms coupled with inflexibility of those terms relative to market conditions have resulted in the deepwater Gulf of Mexico being ranked as having a particularly unstable fiscal system, Rusco observed. Fiscal stability is important to oil company investment decisions.
Though the Interior Department does not set tax rates, the agency enjoys considerable latitude in setting royalty terms for federal leases. Royalty rates, however, cannot be changed once leases are issued; a consequent lack of flexibility in fiscal terms has led in the past to ad hoc changes in royalty rates on new leases, Rusco said.
And an inability for royalty rates to track oil price fluctuations may result in unduly low government revenues. Royalty reductions at times of low oil prices, for the Gulf of Mexico between 1996 and 2007, for example, could end up costing the federal government billions of dollars when oil prices are high, he explained.
Need for review There is a need to review the entire oil and gas fiscal system, including taxation, when determining the levels of royalty rates, Rusco said.
“Because Interior has not comprehensively re-evaluated the federal oil and gas fiscal systems for over 25 years, such a comprehensive evaluation of the systems, both on- and offshore, is overdue,” Rusco said. “Comparing oil and gas fiscal systems and attractiveness for investment is inherently complex and Interior has not collected information needed to perform such a comprehensive review.”
The review needs to take into account the views of industry experts, as well as using the Interior Deparement’s own expertise, Rusco said.
GAO also recommends that Congress consider directing the Secretary of the Interior to have MMS and other Interior agencies establish procedures for comparing federal oil and gas regimes with those of other resource owners and report the results of the comparisons to Congress, Rusco added.
In response, Steven Allred, assistant secretary of the interior, said that a comprehensive evaluation of fiscal systems would be premature because MMS has already commissioned a study into leasing and revenues in the Gulf of Mexico (GAO responded by commenting that it viewed the MMS study as too restricted in scope).
Allred further said new procedures for comparing oil and gas regimes are not appropriate because MMS and BLM already do this, in effect, as part of their existing procedures and because the question of what other resource owners do is not the most important consideration when designing fiscal terms for leases.
MMS evaluates situation MMS evaluates the expected oil and gas resources and the current market conditions “in light of our organic statutes and tax laws” when setting fiscal terms for lease sales and analyzing sale results, Allred said. MMS analysis of lease sale results includes a determination of whether fiscal terms are working as intended.
“Studies and literature are reviewed related to fiscal terms and potential economic, fiscal and geologic outcomes in different countries and regions operating under different fiscal terms,” Allred said.
And GAO has not clarified the link between the level of government take and the attractiveness of an oil province for investors, Allred said.
“It is important to point out that global companies have choices where they make capital investments,” Allred said. “Their investment choices are affected by many variables, including the fiscal risk of rents, royalties, and bonus bids, as well as the cost of capital, risk and the attractiveness of alternative investments.”
An increase in government take could result in a loss of domestic oil and gas production, he said.
Rather than being inflexible, MMS has shown flexibility in establishing fiscal terms for oil and gas leases in the Gulf of Mexico, with the deepwater Gulf of Mexico royalty reductions of 1998 and 1999 being “consistent with anticipated technical, as well as market, conditions at the time of sale,” he said.
MMS and BLM are both investigating the use of sliding royalty scales in the future, he said.
Interior bureaus have achieved the purposes of the Outer Continental Shelf Lands Act and the Federal Land Policy and Management Act in achieving goals such as fair market value, encouraging competitive oil and gas development, protecting the environment and achieving resource conservation, Allred said.
“Maximizing federal mineral revenues or achieving some worldwide ranking of government take are not purposes in the existing laws guiding federal oil and gas programs,” Allred added.
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