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Research Shows Federal Oil Leasing and Royalty Income a Raw Deal for Taxpayers

Oil industry controls huge swaths of public land at world’s cheapest prices

May 18, 2010

WASHINGTON—Taxpayers are receiving significantly less of a bang for their buck from offshore oil development—even though energy companies have access to six times as many leases as they did in the early 1980s.

Statistics compiled by two researchers studying the last 30 years of leasing policy show that per-acre lease rates have plummeted almost nine-fold from shortly after the time Ronald Reagan assumed the presidency to the tail end of President George W. Bush’s second term.

An average of $2,224 per acre for all federal leases sold between 1954 and 1982 careened to $263 per acre for federal leases sold between 1983 and 2008.

And those eye-opening losses don’t even account for how inflation has eaten into the U.S. dollar during that time span.

The recent BP oil spill in the Gulf of Mexico has prompted the researchers who published these findings almost a year ago, to again ask why Congress and the Department of the Interior’s Minerals Management Service (MMS) have been so reluctant to update a leasing program severely altered in favor of the oil industry, first in the early 1980s by James Watt, Reagan’s secretary of Interior, and later again under President Clinton.

“It seems to be a good time to follow the money,” Bill Freudenburg, one of the researchers, told SolveClimate in a telephone interview this week.

Freudenburg, who teaches in the Environmental Studies Program at the University of California, Santa Barbara, undertook the research with Bob Gramling, a professor of sociology at the University of Louisiana, Lafayette. They initially published their findings in the online version of Miller-McCune magazine last June.

“Initially, back when we started our number-crunching, this didn’t look good for the taxpayer,” Freudenburg said. “But we were really surprised at how bad it looks for the taxpayer.”

The professors’ tracking showed that 3,520 leases were sold at the $2,224 average rate, while 21,179 were sold at the $263 rate. Their research didn’t include total number of acres sold.

The duo started studying offshore leasing of public land for energy exploration in the middle and late 1980s when Freudenburg served on the MMS’s scientific advisory committee and Gramling was chosen to be on a committee the first President Bush asked the National Academy of Sciences to set up to examine offshore leasing issues in Florida and California.

How Did It Reach This Point?

Legislation passed in the 1950s designated the Department of the Interior as the agency to manage U.S. offshore lands. Before MMS was created in the early 1980s, each offshore lease sale offered only a limited number of blocks within an offshore area, Freudenburg says. He adds that block selection was based on a U.S. Geological Survey resource assessment.

“Since then, the leasing process has continued to evolve, almost completely privatizing the exploration for and the development and production of offshore energy resources,” Freudenburg and Gramling wrote in their Miller-McCune article. “The government decides on the quantity of land to be leased and sets out royalty rates. Otherwise, however, energy companies hold most of the cards, deciding which tracts to bid on and explore based on survey information only available to the largest of those companies.”

Two major switches to offshore policy, Freudenburg says, enabled the move toward reduced competition and bargain prices for energy companies. One was Watt’s early 1980s policy change to what’s called “area-wide” leasing and the second was the 1995 Outer Continental Shelf Deep Water Royalty Act. More on those two game-changers a little later.

How the Government Gets Its Money

First, Freudenburg says, taxpayers need to understand the two primary ways the federal government “earns” revenue from offshore lands. Competitive bonus bids give companies the right to carry out oil and gas exploration, while royalties are a percentage of the value of the oil or gas actually extracted.

What’s known as a “government take” in the offshore leasing industry is a combination of those bonuses and royalties, plus rent, corporate income tax and special fees and taxes.

A May 2007 Government Accountability Office report concluded that the U.S. federal government receives one of the lowest government takes on the globe. Results from five private sector studies presented in 2006 show that the U.S. government receives a lower government take from the production of oil in the Gulf of Mexico than do states—such as Colorado, Wyoming, Texas, Oklahoma, California and Louisiana—and dozens of foreign governments, according to the GAO report.

“At a minimum, we need to be looking at rates being paid in the rest of the world,” says Freudenburg, citing Norway as an example where the government take is high and the drilling is competitive. “The sensible thing to do is to make our rates that high. Then, later on, when the oil companies get more desperate, we’ll get a higher income from it.”

Authors of the GAO report emphasized that the United States must continue to create a market that is competitive in attracting investment in oil and natural gas development.

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