U.S. Fails to Maximize Revenue From Drilling, Auditor Says

Dec 17, 2013 12:48 pm ET

(Updates with Wyden comment in third paragraph, Interior spokeswoman in fourth paragraph.)

Dec. 17 (Bloomberg) -- Government auditors criticized the U.S. Interior Department for considering and then delaying plans to raise the royalty rate for oil production on public lands, saying that’s resulted in “foregone revenue.”

The department’s Bureau of Land Management scrapped plans in 2012 to raise the standard royalty rate on public lands to 18.75 percent from 12.5 percent, according to a U.S. Government Accountability Office report released today. That delay stands in contrast to Interior’s increase of royalties on offshore production in U.S. waters.

The report “drives home the point that the Interior Department, and especially BLM, may not be keeping up with times,” Oregon Democrat Ron Wyden said in response to the report.

Interior Department spokeswoman Jessica Kershaw said in response to the report that “it remains a high priority for the Department to modernize its regulatory regime in order to set onshore royalty rates and ensure a fair return to American taxpayers.”

Oil and gas production in the U.S. is booming, driven by the revolution brought on by hydraulic fracturing and horizontal drilling. U.S. petroleum production is set to grow by 47 percent in 2020 to 9.55 million barrels a day, the U.S. Energy Information Administration said yesterday. That growth in domestic supply is displacing imports, though it isn’t triggering a dramatic cut in pump prices for consumers, which are forecast to stay at more than $3 a gallon.

Drilling Incentive

At those prices, drillers have an incentive to pay more for access to federal lands, according to the GAO researchers. Leases on the nation’s 700 million subsurface public acres and 1.7 billion offshore acres raised $9.7 billion for the U.S. Treasury in 2012, making it one of the largest sources of nontax revenue for the government.

Companies earned $66 billion from sales of oil and gas produced on federal lands and waters.

“Interior continues to offer onshore leases with lease terms -- terms lasting the life of the lease -- that have not been adjusted in response to changing market conditions, potentially foregoing a considerable amount of revenue,” the GAO report said.

The Interior Department estimated that onshore royalty rate changes in line with what it considered in 2012 could increase revenue collections by about $1.25 billion over 10 years, according to GAO.

The department also doesn’t have procedures in place to raise royalty rates for offshore leases, if needed, the report said.

--Editors: Jon Morgan, Elizabeth Wasserman