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Interior Launches Plan to Adjust Royalty Rates on Federal Lands

The Department of Interior (DOI) followed through on its promise last month to begin taking public comments over a proposal to empower the Bureau of Land Management (BLM) to adjust royalty rates for drilling on public lands.

On Friday, DOI filed a 33-page document, an advance notice of public rulemaking (ANPR), which calls for soliciting public comments and suggestions for the BLM to adjust royalty rates, annual rental payments, minimum acceptable bids, bonding requirements and civil penalty assessments for federal onshore oil and gas leases.

"It's 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," Interior Secretary Sally Jewell said. "The BLM's regulations have not kept pace with technological advances and market conditions, so this is an important information-gathering step as we seek to improve the way the federal government does business."

The public comment period is to last 45 days, following publication in the Federal Register next week.

Last month, Jewell said the ANPR on royalty rates, as well as tougher rules on blowout preventers (BOP), was forthcoming. DOI’s Bureau of Safety and Environmental Enforcement issued a proposed well control rule, which includes requirements for BOPs, last Monday (see Daily GPI, April 13; March 18).

The current royalty rate for competitive oil and gas leases on public lands in 12.5% of the value of production. According to the ANPR, the BLM is authorized under the 1920 Mineral Leasing Act to specify a royalty rate higher than 12.5% for competitive leases, but existing regulations have a flat rate of 12.5%. The royalty rate for noncompetitive leases is also 12.5%, as set by statute.

DOI said any potential revision to royalty rates would be applicable only to new leases obtained competitively, and only after the effective date of any final rule; noncompetitive leases would remain at 12.5%. Royalty changes would also not affect any leases issued under the Indian Mineral Leasing Act or the Indian Mineral Development Act.

According to DOI, for fiscal 2014, onshore federal oil and gas leases produced about 148 million bbl of oil, 2.48 Tcf of natural gas and 2.9 billion gallons of natural gas liquids. Collectively, the leases had a market value of almost $27 billion and generated royalties of almost $3.1 billion. Nearly half of the royalty revenue was distributed to the states where the leases are located.

In its ANPR, BLM "acknowledges that current oil and gas prices are low, relative to the average price over the past decade; however, recognizing the historic variability of those prices, the BLM would be interested in information on the impacts of any royalty rate change at a range of oil and gas prices.

"Additionally, the BLM would be interested in information about the interplay between commodity prices and a royalty rate's impact on the relative attractiveness of federal oil and gas leases."

Interior said it has not raised rental rates since they were initially set in 1987, the same year the minimal acceptable bid at an auction was set at $2 per acre. Meanwhile, minimum bonding requirements have not been increased since 1960. The current rates are $10,000 for lease and individual bonds, $25,000 for statewide bonds, and $150,000 for nationwide bonds.

"We are long overdue to consider an update [to bonding requirements] that will help us ensure that oil and gas sites are properly managed and reclaimed and that taxpayers aren't left picking up the tab," said BLM Director Neil Kornze.

Under the Federal Oil and Gas Royalty Management Act, BLM may levy fines of up to $500 per violation per day of any mineral leasing law, rule, regulation or terms of any lease. If not corrected within 40 days, the maximum daily penalty increases to up to $5,000 per violation per day. Existing regulations impose a cap on the total civil penalty at $300,000.

Other penalties include up to $10,000 per violation per day for failure or refusal to permit lawful entry or inspection (capped at $200,000), and up to $25,000 per day for submitting false or misleading information (capped at $500,000). The maximum penalty for drilling a well in the federal onshore without a permit is $300,000.

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