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GAO: Raising rates could hurt production But federal revenue from production of oil, natural gas, coal on federal lands could increase if royalty rates go up, report says Kristen Nelson Petroleum News
The United States Government Accountability Office released a report in June evaluating the impact of increasing federal royalty rates on onshore oil, gas and coal production.
For fiscal year 2016, GAO said, federal revenues were some $2.5 billion from production on federal lands onshore of oil, gas and coal, with some $2 billion of that amount from royalties.
The agency reviewed numerous studies and did an in-depth review of four by the Congressional Budget Office, the Council of Economic Advisers in the Executive Office of the President, a study prepared for the Department of the Interior’s Bureau of Land Management and a coal report prepared by non-government researchers.
The studies looked at different increases from the current 12.5 percent royalty rate.
One study projected a production decrease of less than 2 percent if royalties were increased to 22.5 percent, based on fiscal year 2016 production data, while another found production impact could be negligible over 10 years if royalties were increased to 18.75 percent, particularly if the rate remained equal to or below the state and private royalty rate.
The impact on coal production of an increase to a 17 percent royalty rate was projected by one study to be a decrease in production of up to 3 percent.
Stakeholders cited other factors which could influence the rate by which production might decline, including: market conditions; cost advantages of different resources; and regulatory burdens of production on federal land.
Studies projected that the net federal revenue increase from raising royalty rates could be between $5 million and $38 million per year, but for coal one study projected that raising the royalty rate to 17 percent might increase federal revenues by as much as $365 million per year after 2025 while another study suggested an additional $141 million per year.
Stakeholders told GAO that higher royalty rates could influence how much bidders were willing to pay in bonus bids, with some stakeholders telling the agency companies would likely offer lower bids if royalties were higher.
No change in decades GAO said “federal onshore royalty rates for oil, gas, and coal production on federal lands have not changed in decades,” so there is no recent data on the impact of federal changes.
The Mineral Leasing Act of 1920 set the royalty rate at not less than 12.5 percent of the amount or value of production for onshore oil and gas leases, GAO said, but until this January BLM regulations generally set a 12.5 percent fixed royalty rate. Oil and gas royalties are calculated based on wellhead value, with deductions or allowances taken after the royalty rate is applied.
Oil and gas production from federal onshore lands for fiscal year 2016 was some 157 million barrels of oil and 3.14 trillion cubic feet of gas, along with 295 million tons of coal, representing about 6 percent of total U.S. onshore oil production, 10 percent of gas production and 40 percent of coal production, resulting in net federal revenues of some $2.5 billion, some $2 billion, or 80 percent of that, from royalties for fiscal year 2016.
Looking at recent production, GAO said that between 2008 and 2016 onshore U.S. oil production increased 77 percent and natural gas production by 35 percent, with production from federal onshore acreage in that same period up 59 for oil and down 18 percent for natural gas.
U.S. coal production has declined since 2008, down 19 percent on federal acreage through 2015 and down 23 percent overall in that same period.
Royalty increase impact GAO said stakeholders it interviewed indicated an increase in federal royalties could decrease production from federal lands because it would increase costs to producers, making production from federal lands less attractive compared to state and private lands. But stakeholders disagreed on the impact of federal royalty increases because of other factors influencing energy company decisions.
The agency said two studies, one by the Congressional Budget Office and one by Enegis LLC, modeled effects on oil and gas production from federal lands of different policy scenarios.
CBO concluded that raising the federal royalty rate for onshore oil and gas to 18.75 would lead to small or negligible reductions in production over a 10-year period, “particularly if the increased federal royalty rate remained equal to or below the royalty rates for production on state or private lands.”
GAO said the current 12.5 percent royalty is the same or lower than rates charged by six states with 90 percent of federal oil and gas production in 2015 (Colorado, Montana, New Mexico, North Dakota, Utah and Wyoming).
The Enegis study found the demand for new federal competitive leases would generally decrease over 25 years if the royalty rate was raised to 16.67, 18.75 or 22.5 percent, unless prices rose, buffering companies from the impact of higher royalties. Production declines for the three increased royalty rates ranged from zero barrels to some 2.8 million barrels of oil per year, equivalent to some 1.8 percent of 2016 fiscal year onshore federal oil production; declines in gas production ranged from zero to 3.4 billion cubic feet year, less than 1 percent of onshore federal natural gas production in fiscal year 2016.
Other factors GAO said stakeholders it interviewed identified several factors which could impact the extent of production changes due to royalty increases, including market conditions and prices, cost advantages of different resources and regulatory burden of federal development.
“BLM officials suggested that raising federal royalty rates is less likely to have a negative effect on production when oil and gas prices are high,” GAO said, with an increase from 12.5 percent to 16.67 percent in royalty rates increasing the cost of production by some $2 a barrel (at oil prices in March of this year).
The Congressional Research Service report said negative effects on production from higher royalty rates could be limited to areas with marginal wells, those with low production rates or higher costs.
“A few stakeholders told us that the competitiveness of federal lands for development depends less on the royalty rate charged and more on the location of the best resources - such as areas with low exploration and production costs,” GAO said. The agency noted that most areas with major U.S. tight oil and shale gas plays do not overlap with federal lands, with overlap estimated at: 9 percent for the Bakken, zero for the Eagle Ford, 9 percent for Haynesville, 6 percent for Marcellus/Utica, 39 percent for Niobrara and 15 percent for Permian.
Some stakeholders also told GAO that there is a higher regulatory cost for development on federal lands “and one stakeholder noted that an increase in federal royalty rates would decrease the competitiveness of federal lands versus state or private lands.”
The agency said officials in Colorado and Texas said they have raised state royalty rates without significant production impact.
Increased revenue GAO said studies it reviewed indicated that raising royalties would raise revenues. “Some stakeholders we interviewed said any effects on federal revenue would depend on how increasing royalty rates for oil, gas, and coal would affect bonus bid revenue, while others said overall market conditions, among other factors, need to be considered.”
For oil and gas, estimates of increased revenue range from $5 million to $38 million per year, some 0.7 percent to 5.2 percent of new royalties in fiscal year 2016.
The CBO study noted the impact would increase over time because increased royalties would apply only to new leases and those would not go into production immediately. That study found that 6 percent of royalties collected in 2013 were from leases issued in the previous 10 years, and estimated a revenue increase of $200 million over the first 10 years if royalties were raised from 12.5 to 18.75 percent, potentially increasing in the following decades, depending on market conditions.
The Enegis study found that net federal revenues would increase under their modeling by $125 million to $939 million over 25 years with royalties of 16.67, 18.75 and 22.5 percent.
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