US considers raising onshore royalty rates

OREANDA-NEWS. April 20, 2015. The US Interior Department is seeking public comments on a potential increase in the 12.5pc royalty rate for onshore oil and gas production on federal lands.

Interior's Bureau of Land Management (BLM) issued an advanced notice of proposed rulemaking today to update BLM's regulations governing royalty rates, annual rental payments, minimum acceptable bids, bonding requirements and civil penalties.

Interior secretary Sally Jewell said the US must have a "candid" conversation about whether taxpayers are "getting the right return for the development of oil and gas resources on public lands."

Jewell said BLM's regulations "have not kept pace with technological advances and market conditions."

Jewell said BLM must respond to concerns raised by the Government Accountability Office, Interior's inspector general and others that say BLM's rules lack flexibility and could be costing federal coffers significant revenue.

BLM has the statutory authority to assess a higher rate for leases offered in competitive auctions than today's 12.5pc. The notice did not say how high the agency is considering raising the royalty rate. But it did ask stakeholders if it should be increased to be consistent with the 18.75pc offshore rate. Royalty rates on state and private lands range from 12.5pc-25pc, the notice said.

Non-competitive leases on BLM lands will remain at 12.5pc, and tribal lands would not be affected by any royalty rate change.

The BLM acknowledged that oil and gas prices today are low compared with their averages over the last decade. The agency urged stakeholders to provide input on the effects of a royalty change across a range of prices, as well as the "interplay between commodity prices and a royalty rate's impact on the relative attractiveness of federal oil and gas leases."

BLM director Neil Kornze said bonding rates and civil penalties likewise "are ripe for a fresh look." Bond rates, which have not been adjusted for 50 years, can be as low as \\$10,000 for a lease-wide bond, \\$25,000 for a statewide bond and \\$150,000 for a nationwide bond. That lease-wide bond rate is comparable to one fifth of 1pc of the cost to drill a well today.

Interior also is considering raising the \\$2/acre minimum bid and the \\$1.50-2/acre rental rates BLM charges for a lessee begins producing oil or gas on a lease. Higher bid requirements would better ensure US taxpayers are getting a fair return from lease auctions, while higher rental rates could prop producers to develop their leases more quickly.

Oil and gas companies produced about 148mn bl of oil, 2.48 Tcf of natural gas and 69mn bl of NGLs on federal lands in FY 2014, the notice said. That production had a market value of nearly \\$27bn and generated royalties of nearly \\$3.1bn.

BLM will accept comments on the proposal for 45 days after it is published in the Federal Register.

Republican staff on the US House of Representatives' Natural Resources Committee said it was "unbelievable" that the US administration has launched a new "assault" on energy development on federal lands. "Hiking the royalty rates will further curtail production and decrease revenue flowing to the federal treasury."

Industry group the American Petroleum Institute upstream group director Erik Milito warned that "yet another set of costly changes to federal rules could drive more economic development and job creation off public lands."

The Independent Petroleum Association of America (IPAA) voiced concerns about raising fees for independent producers at a time when oil prices have dropped about 50pc over the last seven months. IPAA said increasing fees for independent producers, companies that average just 12 employees "will cause small, family-owned businesses to suffer and further discourage energy development on federal lands."