Drilling near the Roan Plateau
The electric toaster and the royalty rate charged to oil and gas drillers on federal land share this in common – they date back to the 1920s.
The Department of Interior, however, is now looking at “modernizing” that 12.5 percent cut of oil and gas sales the federal government gets from drilling operations on its land.
When the current 12.5 percent royalty rate was adopted a man’s dress shirt cost $1 and a Ford Model T went for around $300.
Comparing the federal royalty rate with the rates states charge for drilling on state land, the Denver-based Center for Western Priorities, an environmental group, calculates that taxpayers lost $490 million to $730 million in 2014.
Industry officials counter that drilling on federal land is more difficult than drilling on state or private land. There is some evidence to back them up.
“The calculation is crude and simplistic,” said Kathleen Sgamma, vice president for government and public affairs at the Western Energy Alliance, an industry trade group.
The restrictions on federal land come with the territory, says Nada Culver, a senior attorney with the Wilderness Society. “That is a factor to be considered in setting royalty rates, but the oil and gas operators are getting access to public land that belong to all the people,” Culver said.
The oil and gas royalty rates western states set for their own land range from 16.67 percent in Colorado, Wyoming and Montana to 25 percent in Texas.
It was applying these state rates to production on federal land that the Center for Western Priorities came up with their up to $730 million in lost revenue.
“Year after year we are looking at lost revenue for the federal government and the states,” Greg Zimmerman, policy director at the Center for Western Priorities. The federal government returns about half the royalties to the states. In 2014, the federal government sent $1.4 billion in royalty money to five western states. Colorado received $112.5 million.
The General Accountability Office, an independent federal watchdog agency, agrees. The Department of Interior was placed on the GAO’s “high risk of waste” list in 2011. “We found that Interior did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands and waters,” the agency said.
“Interior is pushing to get off high risk list,” said Zimmerman.
In announcing the notice of the proposal for royalty rate rulemaking in April, Interior Secretary Sally Jewel said it was “time to have a candid conversation about whether the American taxpayer is getting the right return for the development of oil and gas resources on public lands …regulations have not kept pace with technological advances and market conditions.”
The proposed rulemaking is also looking at adequacy of bonding requirements and civil penalty penalties.. The current minimum bond amounts — $10,000 for a lease-wide bond, $25,000 for a statewide bond, and $150,000 for a nationwide bond — have not been updated in two generations.
Still, the industry and some independent analysts say that rates reflect the fact that drilling on federal land is more difficult.
“There is a real question of regulation,” said Mark Haggerty, an economist with Bozeman, Montana-based Headwaters Economics, an independent, nonprofit research group. “It is very different on federal land from state land.”
Headwaters has done on oil and gas activity and has found that the level of tax has little to do with where operators drill. Haggerty said that raising royalty would likely also, by itself, not make much of a difference in drilling activity. “Royalties and severance taxes are functionally the same thing,” he said.
“The argument against higher royalties is that itap harder to permit on federal land,” Haggerty said.
Texas has the highest state royalty rate at 25 percent, but it can take just 10 days to get a drilling permit, while on federal land getting a permit can take years, said David Ludlum, executive director of the Western Slope Colorado Oil and Gas Association.
In Colorado 57 percent of state permits in 2014 were approved within 49 days, according to the Colorado Oil and Gas Conservation Commission.
It took average of 223 days to get a drilling permit on federal land in 2014, according to . Almost 60 percent of that was the time it took for a driller to resolve deficiencies in their permit application.
“Comparing state land or private land with federal land is comparing apples and oranges,” Ludlum said.
Colorado’s Western Slope is filled with examples of the difficulty of drilling on public land. The biggest battle was over the iconic Roan Plateau, which rises 9,200 feet above the prairie in shades of pink and tan. Valued for its streams, woods and wildlife it was the subject of a 10-year battle.
When it finally was put up to lease in 2008 by the Bureau of Land Management, which handles all federal mineral leases, it fetched $114 million – then a record for the lower 48 states.
The plateau, however was never drilled as lawsuits filed by a coalition of environmental groups tied it up in federal court. In a 2014 settlement, 19 of 21 leases on top of the plateau were cancelled Denver-based Bill Barrett Corp. was reimbursed $47.6 million. Barrett was also allowed to drill in the adjacent canyons. Interior Secretary Jewell said the land never should have been leased.
“The Roan was really an unusual situation,” said Mike Freeman, an attorney for EarthJustice, who participated in the lawsuit. “This was a unique, untouched habitat, with rare trout species and by the time of the settlement natural gas prices had dropped and Barrett was looking to get out.”
The Western Slope oil and gas association’s Ludlum argues that is part of the problem. “A company makes its economic calculation in one market and by the time they get a permit prices have collapsed,” he said.
In April 2014, the BLM announced that it was in the White River National Forest because it had not done an appropriate environmental review. That process is still going on with a chance some leases could be cancelled.
“The uncertainty in operating on federal land is huge,” said the Western Energy Alliance’s Sgamma.
The number of federal parcels leased annually dropped 12 percent to 1.2 million acres between 2010 and 2014; new wells declined 20 percent to 2,500 during the same period; and approved drilling permits were down 8 percent, according to BLM statistics.
This is due, industry advocates insist, to the uncertainty and complex rules a driller faces on federal lands. But BLM statistics also show that as of last September there are almost 6,000 approved drilling permits that have not been used, included 635 in Colorado.
During that same 2010-2014 period the spot price for natural gas dropped 50 percent to $2.89 for a million British Thermal Units. It is a market signal that by itself could damper leasing and drilling.
And while, 2010 revisions to the oil and gas drilling may have added some steps to the process, they also dramatically reduced – called protests – filed by environmental groups and others. The number of those challenges to the lease sale of parcels dropped from 1,475 in 2009 to 321 in 2014, according to BLM figures.
“Federal lands are to be managed for multiple uses, including recreation and habitat protection,” said the Wilderness Society’s Culver. “They aren’t there just to maximize the profit for private companies.”
“Perhaps there should be a lower royalty rate, but the rates now are unnaturally low,” Culver said.
The Western Energy Alliance’s Sgamma says as far as industry is concerned the royalty rate is tied up with all the other regulatory issues on federal land. “Once they have a rational regulatory process they can come back and talk about the royalty rate,” she said.
