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A Royal Pain in the … Treasury

The American people are already missing out on billions of dollars from oil companies, and the Department of the Interior is making the problem worse

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©  Accent Alaska.com / Alamy Stock Photo

Oil and gas beneath the ocean floor is a public resource owned by the American people. Extracting it, of course, contributes to climate change, and we must transition away from continued reliance on fossil fuels and toward a clean energy economy.

For now—and until we fully transition away from fossil fuels—companies are supposed to pay fair value for the rights to extract natural resources, like oil and gas. The American people should be receiving royalties, but loopholes and new policies are cheating the American public out of billions of dollars.

When the federal government sells companies’ rights to explore for and extract that oil and gas, it is obligated to ensure that American people receive fair value for those resources. It does this by requiring companies to make three forms of payments:

  1. Bids (made when the company purchases a lease)
  2. Rent (paid to the government each year a lease is owned and not operating), and
  3. Royalties (paid for produced resources)

There are major problems with at least the first and third of those components. It appears that a lack of competition is driving down bid prices and creating a situation in which the government is not getting as much as it should when selling leases. This problem is pretty easy to understand—when companies bid against each other for leases, prices should be higher.

The problem with royalties requires a bit more explanation.

What are royalties?

Royalties are payments made by companies to the United States government based on the value of oil and gas extracted from a lease. For offshore leases, the law sets a minimum royalty rate of 12.5 percent. The math is simple: companies are supposed to pay the federal government 12.5 percent of the value of oil extracted from under the ocean, and they can keep the rest for expenses and profits. The reality is much more complicated.

What is the loophole?

To understand how oil and gas companies have avoided paying billions into the United States treasury, we need to back up 25 years. In 1995, Congress passed the Deepwater Royalty Relief Act of 1995 (DWRRA), which was intended to encourage development by allowing companies to avoid paying royalties on new production on certain leases. The intent was to incentivize oil and gas exploration in “deep water”—more than 200 feet deep—where Congress was concerned that it might be uneconomical to explore without the break. According to the bill’s original supporters, it was intended to be temporary, just to spur the initial development of deepwater drilling. The loophole, however, has remained on the books, and a new Government Accountability Office study shows that the costs to the United States government—and the American people—have been astronomical. Oil and gas companies have avoided paying more than $18 billion in royalties.

On top of this problem, the Department of the Interior recently implemented a new policy that will have the effect of reducing royalty payments from wells in shallow water in the Gulf of Mexico.

So, why is this such a big problem? First, of course, the American people are not receiving the value to which we are entitled for our resources. In fact, just ten years ago, the Department of the Interior raised royalty rates because it considered them too low.

Further, these royalty payments provide funding for the federal government and for some states. Alabama, Mississippi, Louisiana and Texas receive up to 37 percent of revenues from certain offshore leases. Some portion of these funds is dedicated to land and water conservation and other activities intended to offset the impacts of development. Reducing royalties reduces the amount of money available for these activities but, of course, does not reduce the impacts of development.

Finally, royalty payments are already too low because they do not account for the social and environmental costs that result from offshore drilling activities. These costs are borne by the public in the form of air and water pollution, emission of greenhouse gases, and other impacts. They are quantifiable, and companies should be required to pay for them.

What is the solution?

In the face of climate change, we urgently need to transition to a clean energy economy that does not carry the environmental and social costs of fossil fuel production.

But in the immediate term, companies should have to pay their fair share to the American people for the right to produce oil and gas.

Representatives Grijalva and Lowenthal have introduced the Stop Giving Big Oil Free Money Act, which would close the loophole and require companies to pay the royalties they owe.

Please join us on social media in thanking Representatives Grijalva and Lowenthal for their leadership on this issue. Here is an example post to get you started.

  • Thank you @RepRaulGrijalva for helping to save the world (or something else)
  • Thank you @RepLowenthal for doing the right thing (or something better)

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