Last week Bureau of Land Management finally addressed critics with reformed royalty rules.
A recent study of oil and gas leasing terms on federal, state and private lands found that the Bureau of Land Management’s, royalty rate for drilling on taxpayer owned public lands is in many cases 50% lower than the rates being charged by private landowners. It wasn’t the first time that BLM was called to account. The federal government’s royalty rate is half of what Texas, the U.S.’s largest energy-producing state, charges companies that drill on its state-owned lands.
The BLM oil and gas management program is one of the largest Federal government mineral leasing programs. Production value is more than $33 billion, producing more than $3 billion in royalty revenue annually from oil and gas leasing on public lands. Most of this is shared with state and local governments, and nearly $1 billion in royalty revenue from activities on tribal lands, all of which goes to tribes or individuals.
The Center for American Progress review cited above adds to what critics say is a growing body of evidence that the federal government’s royalty, rental, bidding, and bonding policies are failing to adequately protect the financial interests of U.S. taxpayers and energy-producing states. A report released by the Center for Western Priorities estimates that outdated royalty policies are responsible for up to $730 million per year in lost revenue for taxpayers and energy-producing states.
The private oil and gas leases uncovered and examined by CAP require that companies pay the landowner 25% of the value of the resource extracted. The Bureau of Land Management collects only a 12.5% royalty for drilling on national forests and other public lands, while the Bureau of Ocean Energy Management collects an 18.75% royalty for offshore drilling in the federal Outer Continental Shelf.
“The oil and gas industry and its technologies have grown by leaps and bounds in the past century, but the federal government’s royalty policies are frozen in the 1920s,” said Nicole Gentile, the Director of Campaigns for the Public Lands Project at the Center for American Progress. “From a business perspective, the shareholders of America’s public lands—U.S. taxpayers—aren’t receiving a fair share from the development of their resources.”
Because of public pressure and longtime recommendations from the Government Accountability Office (GAO), Interior’s Office of the Inspector General, and the Interior Department’s Subcommittee on Royalty Management, all of which expressed concerns about the adequacy of the BLM’s existing requirements, the Secretary of the Interior Sally Jewell announced a review of the BLM’s oil and gas revenue policies. (In recent years, these concerns have contributed to the Department’s inclusion on the GAO’s High Risk List.) She started an Advanced Notice of Proposed Rulemaking, or ANPR, to solicit feedback on potential changes to the agency’s royalty, rental, bonus bid, and bonding rules. The public comment period on the proposed rule that emerged runs until September 11.
Last week BLM finally addressed critics. “The BLM’s rules concerning oil and gas measurement are over 25 years old and are long overdue for an update,” said BLM Director Neil Kornze, talking about a process of review that started back in 2011.
The new rule in question will replace Onshore Oil and Gas Order Number 3 (Order 3) that covers royalty rates, which has not been updated since 1989 and does not reflect current industry operations or technology. Order 3 sets minimum standards for ensuring that oil and gas produced from leases are properly and securely handled. The BLM now says that updates to these standards are necessary based on its experience with oil and gas measurement in the field and the changes in technology and industry operations that have occurred since Order 3 was originally issued. Why this took so long given the royalty rates and the money involved is a damning question.
Specifically, the proposed royalty rates rule would:
• Establish uniform procedures for designating official points for oil and gas measurement for royalty accounting purposes, known as facility measurement points, that are applicable to new and existing leases;
• Codify existing guidance related to approving commingling, i.e., the -combining of production from multiple leases, unit Participating Areas (PA), Communitized (sic) Areas (CA), or fee or State properties before the point of royalty measurement.
• Establish conditions for the approval of off-lease oil and gas measurement;
• Update requirements related to the use of valve and drain seals, prohibitions on the use of meter by-passes, and reporting requirements;
• Require operators of new and existing oil and gas facilities to provide new site facility diagrams designed to help BLM meet its oversight responsibilities;
• Require purchasers and transporters to comply with the same standards as operators with respect to records.
