Higher royalties for drilling on federal lands don’t make sense


By Merrill Matthews



Convinced that there is more money to be extracted from the oil and natural gas industry, liberals and environmentalists are urging the Obama administration to increase the royalties energy production companies must pay when drilling on federal lands.

Two House Democrats, Raul Grijalva and Alan Lowenthal, have asked the Bureau of Land Management (BLM) to increase the royalty from 12.5 percent to 18.75 percent, which is the rate for drilling offshore.

Presidential candidate Hillary Clinton agreed, calling for “additional fees and royalties from fossil fuel extraction [to be used] to protect the environment.”

The 12.5 percent royalty for onshore oil and natural gas production has remained constant since the 1920s.

However, many states impose much higher royalties for drilling on state-owned land. Wyoming, Utah, Colorado and Montana, for example, all impose a 17 percent royalty fee. New Mexico and North Dakota have a 19 percent fee. Texas charges 25 percent.

So, the argument goes, if many of the states are imposing higher royalties, why shouldn’t the federal government increase its rates and reap billions of dollars in extra revenue?

But the question overlooks the most obvious problem: If drilling on federal lands is such a financial windfall for oil and gas producers, then why has that drilling declined since Barack Obama became president?

According to the Congressional Research Service (CRS), crude oil drilling on federal land extracted 1.77 million barrels per day in 2009. After declining for several years, it returned to 1.78 million barrels per day in 2014. However, as a percentage of total U.S. crude oil production, oil from federal land declined from 33.8 percent of the total in 2009 to 21.4 percent in 2014.

Meanwhile, crude oil production on nonfederal land increased from 3.47 million barrels per day in 2009 to 6.55 million barrels per day by 2014.

For natural gas, production on federal land fell from 5.38 trillion cubic feet in 2009 to 3.52 trillion cubic feet in 2014. In the same time, gas production increased from 16.2 to 23.13 trillion cubic feet on nonfederal land.

If federal royalties are such a bargain, why don’t drillers — who are supposedly only interested in profits — not realize they could pocket billions if they drilled more on federal lands?

The answer is the challenge of dealing with the federal government.

In 2006, the BLM received 10,492 applications for permits to drill (APD) for oil and gas. But in 2009, Obama’s first year in office, BLM only received 5,257. Over the next six years, APD levels remained similar.

One reason for the decline was the average of 307 days it took for BLM to approve or deny an application in 2011, though the agency was able to shorten that to 194 days in 2013. But that’s still 194 days.

Compare that to applications for state drilling. As CRS said, “crude oil and gas development on federal lands takes place in a wholly different regulatory framework than that of development on private lands.” That’s an understatement.

State agencies sometimes approve permits within 10 business days of submission, according to CRS.

That’s 10 days for some states versus 194 days for the federal government. In an industry where time is money, 184 extra days is a lot of time — and money.

So if environmentalists and liberals were successful in raising the federal royalty rate on oil and gas production, it wouldn’t result in a financial windfall for the federal government. It would simply drive more drilling operations to state and private lands.

Instead of the industry getting an unfair break, the current discounted federal royalty rate may be the only inducement to lure drillers into putting up with the regulations Washington imposes.

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Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow at twitter.com/MerrillMatthews.

By Merrill Matthews

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