A push by the Obama administration to increase the federal royalty for onshore oil and gas production is being undermined by a US-commissioned report that concludes such a move could stifle investment and lower the total return to taxpayers.
A study commissioned from the energy consulting firm IHS CERA and delivered to the Interior Department last October concluded that the federal government's system of ensuring a fair return from resources produced on public lands is on par with similar systems in other countries.
The report rejected the notion that the royalty rate alone should be the prime measurement of whether a government is receiving a fair return on production from public lands. It created an index that looked at other factors, such as upfront bonus bids, taxes and risk sharing, then compared the US system against countries it considered to be the US peer group.
The study found that the federal system, as well as individual state revenue systems, rank about average or, in some cases, above average, compared with other countries.
"On a global perspective, the North American jurisdictions in general, and the federal fiscal systems in particular, reap most of the rewards and share very little revenue risk compared with the majority of the jurisdictions included in the study," the report concluded.
Asked by the Interior Department to consider the effect of varying royalty rates, the study concluded that a lower rate in deepwater would make the Gulf of Mexico more competitive compared with other countries. It also concluded that raising rates onshore "would place the federal fiscal systems at the top of the ranking chart and contribute to a diminished competitive position."
The report's conclusions are at odds with statements from Interior Department officials, who often point to a 2008 study from the Government Accountability Office that they say supports the position that US royalties are below what is needed to ensure a "fair return" for taxpayers.
"It was the GAO's finding back in 2008 that said the American taxpayer was not getting its fair return," Interior Secretary Ken Salazar said at a February 28 hearing held by the Senate Energy and Natural Resources Committee.
For the past three years, the Obama administration has proposed raising onshore royalty rates. This year, Salazar said his department is considering raising onshore rates from 12.5% to 18.75% -- the same amount charged for offshore production.
The IHS CERA report as well stated that the GAO "made a finding that the US government is not receiving a fair return on oil and gas leases in the [Gulf of Mexico]."
But the GAO report never reached that conclusion.
"It couldn't be further from what we did say," Frank Rusco, the author of the report, told Platts.
The GAO report examined studies that had been prepared for the oil and gas industry in 2007 and 2008 and concluded that the "government take in the US Gulf of Mexico ranks among the lowest across a large number of other oil and gas fiscal systems."
"Our point was not that that is a definitive indication that the federal government collects too little," Rusco said. "It's an indication that the federal government should periodically look at how much it takes compared to others and other factors that matter."
The GAO report went on to conclude that "federal oil and gas leases in the deepwater US Gulf of Mexico and other US regions are attractive investments."
Both the GAO and the IHS CERA reports encouraged regulators to explore a less rigid royalty system. More built-in flexibility might reduce the pressure to change royalty rates on an ad hoc basis to respond to swings in the price of oil and record industry profits.
Critics, including Republicans in Congress, say the GAO report was flawed because it only looked at royalty rates, which are levied on actual production, and did not consider the billions of dollars companies pay up front in the form of bids for the right to explore on federal lands.
Rusco confirmed that the primary study the GAO considered did not take the up-front payments, called bonus bids, into account.
"That's part of the reason we didn't say we had a complete picture of how competitive the government is in terms of attracting investment," Rusco said.
But some of the other studies the GAO looked at did consider bonus bid payments. The combined conclusion was that the amount of revenue the US collects is "on the low end" of other countries and even other US states.
"But that doesn't mean we collect too little," Rusco said. "What we tried to point out was that you want to balance collecting public revenue for public resources against attracting private investors to that resource. That's the whole ball game."
Questioned by Republicans about the new study, federal regulators seem to have backed off earlier suggestions that a proposal to raise onshore royalty rates would come soon.
"We're looking at that analysis and will address it," Deputy Secretary David Hayes told the Senate Energy and Natural Resources Committee February 28.
