By Lori LeBlanc, LMOGA Offshore Committee Director for BIC Magazine
Pricing is everything. In retail and in real estate, we all know that price can either attract prospective buyers or drive them away. The same can be said about the federal government’s approach to royalty revenue for offshore oil and gas production.
The U.S. depends on offshore revenue as it is the second largest income source to the federal treasury behind income taxes, funding everything from school lunches to coastal restoration. Without a sensible royalty rate for producing American oil and gas on the Outer Continental Shelf (OCS), however, our nation may be permanently driving away this important revenue source and a unique opportunity to be energy dominant. To ensure long-term revenues and increase offshore investments, the federal government must take a hard look at royalty rate reduction.
U.S. federal oil and gas royalties are payments made by companies to the federal government for oil and gas extracted on public lands and in public waters like the Gulf of Mexico (GOM). The royalty rate represents a portion of the production value of the oil and gas extracted, and the rate is not currently consistent across the industry nor across the country.
Since the Mineral Leasing Act was passed in 1920, the federal royalty rate for oil and natural gas produced onshore has remained steady at 12.5 percent, while offshore production has experienced rate volatility over the years. In 2007 and 2008, the Department of Interior (DOI) raised royalty rates for shallow water and deep water production from 16.67 percent to 18.75 percent. The shallow water rate was later reduced to 12.5 percent in 2017. In the deepwater OCS, however, where the majority of new lease sales are now located, the rate remains a significantly high 18.75, crippling America’s ability to compete in the global energy market. The impacts are seen in recent GOM lease sales.
According to the Bureau of Ocean Energy Management, active Gulf leases have declined by 68.7 percent, from 42 million acres in 2006 to 13 million acres in 2018. Lease sale revenues also declined by 68 percent from 2014 through 2017, from $851 million down to $274 million. Not only does this downturn in the number of leases sold and the prices producers are willing to pay for them signal a reduction in American energy production, it also points to dwindling future revenues for important federal programs and revenue-sharing for coastal states. Since 100 percent of revenue the state collects from its share of federal offshore royalties is dedicated to coastal restoration, for example, Louisiana has a lot to lose if this trend continues. It’s time for a change.
The declining interest in recent Gulf of Mexico offshore lease sales is evidence that more needs to be done to attract new investments, create more jobs and increase revenues to the federal government. The DOI’s Royalty Policy Committee issued a recommendation to Secretary Ryan Zinke on February 28 this year to “Revise, clarify and simplify the process for granting varying royalty rate for declining or particularly costly fields.” Unfortunately, the Secretary announced that he would not provide royalty relief for OCS production in 2018.
LMOGA was disappointed in the Secretary’s announcement, but continues to work with industry leaders and federal policy makers to push for an across-the-board rate reduction that will spur future production in the deepwater Gulf amid low global crude prices and accelerated competition from other oil and gas basins like Mexico and Brazil.
In recent years, America’s Gulf has produced record amounts of oil and natural gas from industry investments made several years ago. That level of production and the federal revenue generated from our offshore waters is not sustainable for the long-term, however, without an increase in industry investment. Royalty rate reduction is the spark that is needed to attract producers back to the Gulf and fuel an investment growth, securing our country’s energy dominance, creating jobs, boosting federal revenue and funding Louisiana’s coastal restoration and protection efforts.