Interior Department Has Stopped Trying To Raise Oil And Gas Royalty Rates, Say Government Auditors

CREDIT: AP Photo/James MacPherson

A report released Tuesday by the U.S. Government Accountability Office (GAO) found that the Department of the Interior has “discontinued” an effort to increase the royalty rate that companies must pay to the government for extracting oil and gas from onshore public lands. The report also raises serious questions about whether taxpayers are receiving a fair return for the extraction of their natural resources.

Currently, oil and gas companies are required to pay 12.5 percent in royalties for drilling onshore. But royalty rates for drilling offshore are usually set at 18.75 percent, while most Western oil and gas producing states charge between 16.67 and 18.75 percent. The state of Texas charges a 25 percent royalty rate. In a 2007 report, GAO found that the U.S. government “receives one of the lowest government takes in the world.”

While the agency has periodically changed royalty rates for offshore drilling, the rate for onshore drilling has not increased from its statutory minimum of 12.5 percent. That level has not been permanently raised since it was first set in 1920.

But while GAO says that the Interior Department planned to take the first step in the regulatory process in July 2012 to “set an onshore royalty rate of 18.75 percent for oil production on new federal competitive leases but leave the royalty rate for gas production unchanged at 12.5 percent,” it also finds that the agency:

discontinued its efforts to pursue the revised regulations because, according to Interior officials, the department does not have enough information to determine how to adjust onshore royalty rates…

…officials told us that higher priority rulemaking initiatives, such as regulations for hydraulic fracturing and revisions to its oil and gas measurement regulations, precede it and that limited resources constrain their ability to meet program demands.

This revelation comes just three days after a report by the Washington Post’s Juliet Eilperin found that “The White House systematically delayed enacting a series of rules on the environment, worker safety and health care to prevent them from becoming points of contention before the 2012 election.”

Royalties and other payments for federal oil and gas leases provided $9.7 billion in revenues for fiscal year 2012, and was thus the federal government’s largest non-tax source of revenue. All told, companies received more than $66 billion from selling taxpayer-owned oil and natural gas that same year.

But in 2011, in part because of the Interior Department’s failure to “provide reasonable assurance that it is collecting its share of revenue from oil and gas produced on federal lands,” GAO added the management of oil and gas resources to its “list of programs at high risk of fraud, waste, abuse, and mismanagement.” While some improvements have been made, as of 2013 GAO has not taken the program off of this list.

Oil and gas are not the only natural resources where questions about a fair return to taxpayers have been raised. The Interior Department’s own Inspector General found this summer that taxpayers have lost at least $62 million from undervaluing coal mined on public lands. And Reuters revealed earlier this year that coal companies may be getting away with low royalty payments by undervaluing coal domestically and getting a higher price for overseas sales.